How well do consumers anticipate retirement healthcare, LTC costs?

According to a recent study by Jackson National Life Insurance Company, there is a notable gap between individuals’ perceptions of health care and long-term care retirement costs and their overall financial preparedness, underscoring the need for better retirement planning.

“Retirement should be a time for security and stability; however, our research shows many households may be unprepared for the realities of the healthcare challenges and expenses they will face,” said Glen Franklin, assistant vice president of Research, RIA and Lead Generation Strategy for Jackson National Life Distributors LLC, the marketing and business distribution of Jackson.

“These new survey data should be a wakeup call for policymakers, financial professionals and older Americans themselves,” said Andrew Eschtruth, director of the Center for Retirement Research at Boston College. “We are particularly concerned that too many people nearing or in retirement don’t have a good grasp of their potential healthcare needs and out-of-pocket costs, which could narrow their options when it comes time to pay the bills.”

Retirement cost findings

Key findings from the research include:

• •Healthcare costs are grossly underestimated. Nearly two-thirds of pre-retired investors surveyed are underestimating their prospective healthcare expenses in retirement, anticipating health care expenses at least $1,220 below the $8,600 annual estimate and possibly increasing their healthcare risk. Additionally, only 27% of investors surveyed believe they will require long-term care at some point in their lives. However, 70% of individuals turning 65 each year are likely to need this type of care at some point in their lives. This is particularly notable, as Jackson’s recent longevity risk study found the vast majority of investors inaccurately predict their life expectancy, increasing retirement income planning risk.
• Rising costs and advancements in technology increase financial burden. Advances in medical technology and treatments are expected to increase healthcare costs significantly over the next decade. The price of medical care including services, insurance, drugs and equipment, has increased by over 120% since 2000, leaving many retirees at risk of draining their savings. These findings align with insights from Jackson’s 2024 inflation risk study, which examined how pre-retired households struggle to adapt to rising costs of essential expenses, including healthcare, in the face of inflation.
• Investors are considering asset spend-down to qualify for Medicaid. More than 60% of investors surveyed said they plan to or may consider spending down their assets to qualify for Medicaid as a long-term care funding solution but may be underprepared for the dramatic life changes that would come with spending down their assets.
• Concerns over long-term care costs are amplified among financial professionals surveyed. Two in five financial professionals are concerned that clients will be unable to afford acceptable care, with 56% citing this as a major risk for retirees.
• Personal experience drives better preparedness. Respondents who have seen family members require long-term care are nearly twice as likely to believe they will need similar care. This group is also more proactive in exploring costs, adjusting retirement timelines and planning for assisted living expenses.

“Our research is particularly timely given potential policy shifts resulting from the election outcome, as proposals addressing healthcare reform and federal funding for long-term care programs could significantly impact retirees’ healthcare costs and savings strategies. This further underscores the importance of working with financial professionals to prepare for an evolving landscape and proactively address healthcare risks in investors’ retirement plans."

Estimating retirement costs

When respondents were asked for their best estimate of how much money they and—if applicable—their spouse/partner will spend per year after they retire for out-of-pocket healthcare costs, including doctors, hospitals, prescription drugs, vision care, and dentistry, 35% of them estimated less than the median amount of $4,000/year, while 23% could not make an estimation, said Franklin. Meanwhile, he added, 80% of respondents think that someone in poor health would spend more than $5,000 per year on out-of-pocket healthcare costs alone, while respondents in poor health actually report an average of $4,700 per year for total healthcare expenses.

And when respondents were asked for their best estimate of how much money they and—if applicable—their spouse/partner will spend per year after they retire on all health insurance costs, 57% estimated less than the likely range of $10,000-15,000 per year, while 34% could not make an estimation. Then when they were asked how much they think it would cost annually to get around-the-clock, long-term care in their home, 38% estimated less than the likely range of $75,000 or more. For the annual cost of the average nursing home in their area, 58% estimated less than the likely range of $100,000 or more.

Underestimating costs can negatively affect a consumer’s financial and retirement planning. As Franklin pointed out, “underestimating what is likely to be the largest expense in retirement can result in failure to identify sufficient sources of guaranteed income to cover necessities, or depletion of financial assets with many years left to live—both of which could cause a dramatic decline in lifestyle or—in the worst case—financial insolvency and the inability to maintain independence.”

Teaching clients about healthcare costs

So, what are some of the steps that advisors can take to teach their clients about these costs and help them take a proactive approach to their financial planning? Sharing the basic facts is a great start, said Franklin. In surveying financial professionals, he said that 53% reported that they do not discuss Medicare, Medicare Advantage or supplemental health insurance with any of their clients. Moreover, 59% reported that they do not discuss the financial risk of needing long-term care with any of their clients. “Their clients cannot properly prepare for retirement if they do not have a full picture of the major costs involved with retirement,” he pointed out.

The research, conducted between July 12 and August 2, 2024, included online surveys of more than 400 financial professionals and 500 investors with at least $100,000 in financial assets and between the ages of 48 and 78. Respondents were required to participate in or lead household financial decision-making.

The study is the third installment of Jackson’s Security in Retirement Series, conducted in partnership with the Center for Retirement Research at Boston College, and follows the initial longevity risk and inflation risk studies, which were released over the past 15 months. Jackson said that this multi-phased research initiative aims to provide useful, actionable and research-based insights on many potential threats to financial security in retirement.

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