Where and How to Invest Your Long-Term-Care ‘Bucket’

I often talk about “bucketing”—structuring a portfolio based on anticipated spending needs—in relation to overall retirement spending. Parking near-term spending needs in cash, intermediate-term outlays in bonds, and long-term spending in stocks has always made intuitive sense to me, because it matches time horizon to assets that are likely to have a positive return over that time frame. And I’ve heard from readers over the years that this framework has helped provide them with peace of mind and given them confidence in their retirement plans. I’ve created numerous retirement Bucket portfolios based on that basic concept.

But the approach can be useful for other savings and investment goals, too, including covering long-term-care costs out of pocket. I wrote last week about how to decide how much to set aside for long-term-care expenses, for people who have decided to forgo insurance. But where and how should those funds be invested?

Where to Invest for Long-Term Care

First, let’s clear up one common misconception around bucketing: Each bucket doesn’t need its own account, and your long-term-care bucket can reside inside one of your already-existing accounts. (If you’re using buckets for retirement spending, the three buckets would probably be arrayed across multiple account types—traditional tax-deferred, Roth, and taxable—in sync with whatever sequence you were planning to use to spend from those accounts.) So you don’t have to maintain a separate account for your long-term-care fund, but you do need to let your loved ones know of its existence.

The question is, which account makes the most sense, from a tax perspective, as a receptacle for out-of-pocket long-term-care costs?

A health savings account might look like the obvious choice. Healthcare is right in its name, withdrawals from an HSA to cover qualified healthcare expenses are tax-free, and most long-term-care expenses would qualify. There are a couple of drawbacks, however. One is that annual contribution limits—currently $4,300 for people with single coverage and $8,550 for those with family plans—might impede the ability of people over age 50 to build up a significant bulwark in the HSA between now and retirement. (Once you’re covered by Medicare, you can’t be covered by a high-deductible health plan and additional HSA contributions are also off limits.) It’s still well worth investing in an HSA if you have access to one, but you might not be able to gain critical mass for long-term-care expenses.

My other reservation is that the tax benefits of HSAs are almost too good for long-term-care expenses. That’s because long-term-care costs are deductible to the extent that they, combined with other healthcare outlays, exceed 7.5% of your adjusted gross income in a given year. That means that you could be taking tax-free withdrawals from the HSA in the same year that you had those very high deductions, so you’re not taking full advantage of the HSA’s tax benefits. Finally, you’re likely to spend from your long-term-care bucket at the end of your life, and any unused funds in that bucket could pass to your heirs. The problem is that, if HSAs are inherited by someone other than your spouse, the tax benefits effectively cease upon your death.

To help take advantage of high deductions associated with long-term care, you’d ideally pull your long-term-care expenses from an account that itself is highly taxed. That points toward a traditional IRA. Most older adults have the bulk of their retirement savings in IRAs to begin with. Withdrawals from a traditional IRA or other traditional tax-deferred account are indeed taxable, to the extent that they consist of pretax contributions and investment earnings (in other words, the bulk of most tax-deferred accounts). But individuals incurring heavy long-term-care costs often easily exceed the threshold for deductibility of healthcare expenses. (In 2025, healthcare expenses that exceed 7.5% of adjusted gross income are deductible.) That means that the deduction can offset the taxes due on the IRA withdrawal.

It’s also worth noting that most long-term-care costs are incurred later in life, when required minimum distributions (which apply to traditional tax-deferred accounts for people who are over age 73) apply. In other words, the money has to come out of the account and be taxed at this life stage anyway, and the medical-expense deduction helps to ease the tax burden.

How to Invest for Long-Term Care

In terms of how to invest the long-term-care funds, one thing’s for sure: Cash isn’t going to cut it, especially if you haven’t yet retired or just did. That’s because long-term-care inflation has been running higher than the general inflation rate. In Genworth/CareScout’s 2024 Cost of Care survey, for example, inflation was running above the general inflation rate in every single category. And in some core categories, like nursing home care, the inflation rate was 7%-9%!

Obviously, outearning inflation is mission-critical for your long-term-care fund. And remember, you’re not just defending against general inflation but potentially higher long-term-care inflation. You need some growth, and you need to take some risk to enable that growth.

As with any type of Bucket portfolio, your proximity to spending your money should be the key determinant of how much risk to take. If you’re setting up a long-term-care fund in your mid-60s, for example, the data on long-term-care usage suggest that you’re unlikely to need care—or your fund—for another 15 years. (The average nursing home resident is 81 years old, though that number is brought down by younger people with permanent disabilities who live in long-term-care settings.) In other words, at that life stage, your risk capacity is high, and your long-term-care portfolio should be built for growth and mainly parked in equities.

As you move into your mid-70s and a long-term-care need could realistically arise within the next five to 10 years, you can transition more of that portfolio to bonds and cash. A balanced asset allocation, along the lines of my Moderate Retirement-Bucket Portfolios, is a guide. If and when you begin spending from the long-term-care fund, it makes sense to position the assets more conservatively still, with the lion’s share of assets in bonds and cash.

Of course, as with determining how much to set aside for long-term care, none of this is an exact science because you’re missing some key inputs: You can’t tell in advance whether and when you’ll have a long-term-care need and what its duration might be. And in any case, it’s unwise to assume that you’ll necessarily be able to continue managing your portfolio into your later years. A worthy, no-maintenance alternative to a long-term-care portfolio holding multiple investments would be a low-cost static allocation fund, such as Vanguard LifeStrategy Moderate Growth VSMGX, that bundles both fixed-income and equity assets into a single holding.