retirement planning |  july 10, 2023

The Truth About Health Care Expenses Late in Life

Many retirees fear outliving their savings, but those fears are likely overstated.

 

Key Insights

  • 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.

Sudipto Banerjee, Ph.D.

Vice President, Retirement Thought Leadership

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 and services (e.g., nursing home care, 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 semiprivate 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.

We focused on out-of-pocket costs late in life associated with:

  • Hospital stays

  • Nursing home stays, including other long-term care stays (excludes hospice)

  • Doctor visits

  • Dental services

  • Outpatient surgery

  • Prescription drugs

  • Home health care

  • Usage of special facilities (e.g., adult day care, physical therapy, social worker, transportation for elderly, etc.)

  • A catchall “other” category

1T. Rowe Price Retirement Savings and Spending Study (2022). Respondents answered as a major or minor concern.
2Banerjee, Sudipto, “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?” EBRI Issue Brief, no. 447 (Employee Benefit Research Institute, April 3, 2018).
3Genworth Cost of Care Survey (2023)
4Health 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.

Important Information

This material is provided for general and educational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making.

Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.

The views contained herein are those of the authors as of July 2023 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision. Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

202307-2994849

 

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