Jackson National study: vast underestimate of health care, LTC costs for retirement

Jackson National Life Insurance Company, the main operating subsidiary of Jackson Financial Inc., recently released key findings on how retirees and financial professionals perceive healthcare risk and the associated impacts on retirement income planning. These include costs of healthcare and long-term care.

Jackson’s research shows a notable gap between individuals’ perceptions of healthcare and long-term care costs and their overall financial preparedness, underscoring the need for better retirement planning. The findings reveal critical risks once retired, particularly in light of rising healthcare expenses, longer lifespans, and the increasing prevalence of chronic conditions, all of which highlight a growing need for proactive planning to achieve a secure retirement.

Key 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 healthcare 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 the 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.

“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 distribution business of Jackson. “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."

Impact of underestimation of costs

So, what are some of the effects of this underestimation of individuals’ perceptions of healthcare and long-term-care costs on their overall financial preparedness?

“Healthcare and long-term-care costs are often the most significant expenses we face in retirement,” Franklin said. “What is made clear by the study is that people are confused about options, uninformed about costs, and—as a result—may have woefully inadequate plans in place to finance those expenses while maintaining a satisfactory lifestyle. While those households that receive financial advice are in a somewhat better position, there is still a significant knowledge gap and associated planning opportunity to ensure households throughout the U.S. are adequately prepared for the scenarios they may face in retirement.”

Franklin shared the following additional data points, based on the results from Jackson’s advisor and investor surveys:

• 56% of advisors surveyed thought not being able to afford good long-term care was a major risk to the financial security of their clients, while 47% had the same concern about not being able to cover large medical expenses.
• 40% of advisors were worried or very worried that some of their clients will need long-term care but may be unable to afford the quality care they desire.
• 59% of advisors believe clients see long-term care coverage as costing more than they can afford, with the implication that some of those clients may not be properly assessing the cost/benefit tradeoff, since they may be underestimating both the likelihood and the cost of that care.
• 40% of advisors report that less than one-fifth of clients have an emergency fund to cover increases in healthcare costs.
• 77% of advisors report that they would suggest a Medicaid spend down if the client needs long-term care.
• While around a third of retirement investors surveyed report being worried about the cost of healthcare, long-term care, cognitive impairment, or major illness, they are least likely to explore issues related to long-term care when thinking about retirement.
• While 95% report having health insurance, only 24% have long-term care insurance.

Addressing the underestimation issue

As financial professionals work with their clients, there are several steps they can take to correct this underestimation, help their clients prepare for an evolving landscape, and proactively address health care and long-term-care risks in their retirement plans.

According to Franklin, the first and most important step is to de-mystify the topic with clear and concise guidance around healthcare options in retirement.

There are only two or three components to coverage, he added. These are:

• Part A (hospital insurance) + Part B (supplemental coverage for routine care) OR Part C (private coverage equivalent to both Part A and Part B)
• Part D (prescription drug benefit)

“Financial professionals should start with these simple building blocks and work through the details over time, so the client doesn’t become overwhelmed,” he said.

Second, they should provide the essential facts on long-term care. On average, he said, about 70% of people will need it at some point, the length of need can be 2-3 years, and the cost of skilled, full-time care can be $100,000/year or more.

Then, based on the projected financial resources available to the client, Franklin said that they should designate assets to cover the expense, insure the risk, identify a friend or family member as a caregiver (the most likely scenario), or plan on impoverishment to qualify for Medicaid coverage.

Third, financial professionals should take the emotionality out of the discussion. “Huge costs and mortality are scary topics,” he pointed out. “The simple technique of switching the discussion from how “you” or “your spouse” will fare to talking about how “someone like you” or “someone like your spouse,” makes it much more approachable and also is likely to keep the discussion bounded in realistic estimates of how likely a scenario is or how much it will cost.”

“Finally,” Franklin said, “the only robust way to deal with uncertainty in the future is to insure the risk and obtain a guaranteed outcome. That approach is applicable to protecting income, assets, or loved ones.”

Jackson’s ongoing work with the Center for Retirement Research at Boston College aims to help retirement investors and financial professionals better navigate financial challenges and mitigate risks to retirement income planning. Part one of Jackson’s Security in Retirement Series focused on longevity risk, or the risk of outliving income when faced with the possibility of living longer than expected, and part two of the Series focused on inflation risk. Future studies will explore and analyze a selection of other critical risks impacting Americans’ security in retirement, such as market dynamics and policy risk related to government programs.

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

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