Health care costs for retiring Americans average $260,000 and can exceed $500,000

Health care costs for retiring Americans, including nursing home care, average $260,000 and can exceed $500,000, according to new research conducted by the Center for Retirement Research (CRR) at Boston College and underwritten by Prudential Financial (NYSE: PRU).

“Without managing this risk, in some cases, a household may possibly have to either forego needed health care or rely on Medicaid.”

According to the study, “What is the Distribution of Lifetime Health Care Costs from Age 65,” in over 300,000 simulations the average remaining uninsured lifetime health care expenditure for a typical married couple age 65 is $197,000. This amount represents the present value of the couple’s premiums for Medicare and private insurance, out-of-pocket payments, and home health costs, but does not include nursing home care. And while this figure represents the average, many households will incur greater expenditures. In fact, a typical household has a 5-percent risk that the present value of its lifetime uninsured health care costs will exceed $311,000. And when nursing home costs are included, the amount for a typical couple increases to $260,000, with a 5-percent risk of exceeding $570,000.

“Even at the peak of the stock market in 2007, less than 15 percent of households approaching retirement had accumulated that much in total financial assets, much less financial assets available for health care costs,” states Alicia Munnell, director of the CRR.

The CRR undertook the study to better determine the risk American households face of incurring exceptionally large health care expenses in retirement. “The objective of the analysis was not to calculate how much households spend on health care in practice, or even how much households should optimally choose to set aside to cover health care costs – but to quantify the magnitude and distribution of potential lifetime expenditure,” according to Anthony Webb, associate director of research for the CRR.

The study cites the main sources of retired households’ health care cost risk as co-payments for Medicare covered payments and payments for non-covered services, such as nursing home care. About one-third of individuals turning 65 in 2010 will need at least three months of nursing home care, 24 percent more than a year, and 9 percent more than five years. In 2008, the annual cost of a nursing home was about $71,000 for a semi-private room and $79,000 for a private room. Medicare pays for a maximum of only 100 days of nursing home care.

“Americans need to assess the possibility that they may incur out-of-pocket health care costs that are significantly higher than average,” said Malcolm Cheung, vice president of Long Term Care for Prudential. “Without managing this risk, in some cases, a household may possibly have to either forego needed health care or rely on Medicaid.”

The study also found that although lifetime health care costs decline with age, they remain substantial. At age 85, couples face an average remaining lifetime cost of $140,000 without nursing home care, and they face a 5 percent risk of exceeding $266,000. Including nursing home care, the average cost is $203,000, with a 5 percent chance of exceeding $477,000.

The study concludes that when deciding how much to save for retirement, and how rapidly to draw down their wealth during retirement, households need to consider:

  • What risk they are prepared to accept of having their assets substantially depleted by health care costs
  • Whether they are above or below the average risk of incurring exceptionally high costs
  • Whether they should insure against health care costs by purchasing long-term care insurance.

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