Retirement healthcare costs get regular attention as the biggest unknown expense most of us will face as we age. Yet at least one of those costs—long-term care—stems from a situation that is statistically well-known. About 70 percent of people now age 65 and older will need some period of extended care during the remainder of their life. Further, according to a recent study, people who think they may need long-term care at some point turn out to be pretty reliable forecasters of their own futures.
The heavy odds of incurring long-term care expenses makes a recent study by the Employee Benefit Research Institute (EBRI) all the more dramatic. The study, by EBRI research associate Sudipto Banerjee, calculates the enormous financial drain of nursing home stays on several components of household wealth, and compares this impact with the financial health of households that don't have to absorb such costs.
In 2000, 6 percent of seniors (anyone at least 65 years old) spent at least one night in a nursing home during the previous two years. By 2010, the comparable figure had risen to 8.5 percent. Over the same period, the percentage of seniors who received some type of professional home healthcare services rose from 9 percent to 13 percent. Keep in mind that this is just for a two-year exposure period during a window that may span 20 or 30 years.
"Seniors face a number of retirement planning uncertainties, including longevity risk (the risk of outliving one's assets), inflation risk (the risk of asset erosion), and investment risk (the risk of investment losses)," EBRI says. "But perhaps none is as critical to their retirement security as health risk. Health shocks toward the end of life can result in serious functional limitations and even permanent disability ... One of the biggest health expenditure shocks a retired individual can experience is entry into a nursing home."
EBRI looked at what happened to the household assets of people who had spent time in a nursing home. People with short stays (fewer than 30 nights) had median household wealth of $108,300, those with stays between 31 and 180 nights had $67,836, and those who stayed more than 180 days had median household assets of only $5,518 (median means half of the people had more money, and half less).
Meanwhile, seniors who never went into a nursing home had median assets of $173,848. And their household assets continued to rise as the assets of those using nursing facilities were dropping. "This suggests that nursing home entrants are less wealthy to begin with," EBRI said. "Possible reasons could be that the average age of nursing home entrants is higher than non-entrants, or that nursing home entrants are less healthy, a condition that correlates with less wealth."
Seniors were asked if they thought they might need nursing home services and then their actual patterns of future nursing-home stays was reviewed. It turns out that their predictions were broadly accurate, EBRI said, with "the chances of an actual nursing home stay increasing steadily with the self-reported probability of entering a nursing home."
So, ask yourself if nursing home or extended home-based, long-term care might be in your future. Accepting the possibility of needing such care triggers the need to figure out how to plan for such a future. And Americans are, by and large, not so good at planning. But a first step is to understand the three funding sources for long-term care beyond personal savings:
1. Medicare provides limited benefits of up to 100 days, but only in a skilled nursing facility and only after a hospital stay. Surveys have shown consumers believe Medicare provides generous long-term care support, but it does not.
2. Medicaid will fund care for low-income people who have few financial resources, which describes virtually everyone after they've spent time in a nursing home. "Nearly half of the seniors who live for more than six months in nursing homes surrender almost all of their income and assets," the EBRI study says.
3. Private long-term care insurance. There has been a sustained rise in nursing home residents covered by this insurance—to 14 percent in 2010 from about 6 percent in 2000. But policies can be expensive. A 2009 study found annual premiums for a typical policy averaged $2,800 a year for policies purchased when the owner was 55, $4,500 at age 65, and $9,600 at age 75. Since this study, some insurers have left the long-term care market and premiums have risen.