Many retirees fear outliving their savings, but those fears are likely overstated
- Despite strong concerns, the likelihood that health care costs in the final two years of someone’s life will inevitably deplete their finances in retirement is low.
- While nursing home and long-term care costs increase with age, data show that most final stays in these facilities lasted less than three months.
- Planning for late life care should incorporate costs versus preferences when evaluating insurance coverage, care providers, and asset preservation needs.
There is a perception among many retirees that health care expenses mostly associated with long-term care will spike near the end of life leaving them penniless. This becomes even more concerning if there is a surviving spouse. New research from T. Rowe Price finds that 67% of retirees are concerned about the cost of long-term care, services (i.e., nursing home, assisted care and home health care), and 63% are concerned about out-of-pocket health care expenses.1
With that in mind, fear of these unknown costs could be having an effect on retiree spending patterns. Other research around retiree spending shows that many retirees cautiously spend their money.2 In particular, those with higher assets tend to spend down at a slower rate.
This behavior is likely driven by uncertainty on many fronts, such as market risk, longevity risk, and the future cost of medical care and long-term care. It’s more about fearing the storm of the century than a rainy day. That’s not surprising given the median annual cost of a semi-private room in a nursing home tops $100,000, and the median assisted living charges now exceed $57,000 a year.3
But could the fear be overblown? Not every retiree spends a year or more in a nursing home or assisted living facility. While some short-term stays in nursing homes and assisted living facilities are covered under Medicare, custodial care is not covered by Medicare and is generally responsible for high out-of-pocket costs.
So, a natural question is, how much do people really pay out-of-pocket for their health care late in life?
In order to better understand what retirees can expect to pay for out-of-pocket expenses—including nursing home care—during the last two years of life, we examined data from the Social Security Administration-sponsored Health and Retirement Study.4
We excluded from our calculations:
- Health insurance premiums because those are predictable and not subject to sudden large increases late in life, and
- Households that had already exhausted all their assets and were covered by Medicaid by the time they reached their last two years of life.
1 T. Rowe Price Retirement Savings and Spending Study (2022). Respondents answered as a major or minor concern.
2 Banerjee, Sudipto, “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?” EBRI Issue Brief, no. 447 (Employee Benefit Research Institute, April 3, 2018).
3 Genworth Cost of Care Survey (2023). https://www.genworth.com/aging-and-you/finances/cost-of-care.html
4 Health and Retirement Study, public use data set. Produced and distributed by the University of Michigan with funding from the National Institute on Aging (grant number NIA U01AG009740). Ann Arbor, MI.
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