This top concern of U.S. retirees is a ‘huge risk factor,’ says retirement expert—here’s how to plan for it

No matter how you plan to retire, you likely have something you’re looking forward to, from more time watching your grandkid’s soccer games to dockside piña coladas.

But living in retirement comes with some concerns, too.

Among current retirees, 31% say declining health or illness is their biggest worry, according to CNBC’s August 2024 Your Money retirement survey conducted with SurveyMonkey — the most common response. Dealing with health-care costs was the second-most prevalent concern, at 16%, with another 14% saying they fear running out of money.

For millions of Americans, those worries tend to converge in troubling ways. Consider Morningstar’s recently updated model of U.S. retirement outcomes. After factoring in spending, investing and life expectancy data, among a litany of other factors, researchers forecast that 45% of U.S. households will run short on money in retirement.

While certain behaviors, such as investing over a long period in a workplace retirement account, drastically boost your odds of fully funding your retirement, researchers say, one factor nearly always has the opposite effect.

“Long-term services and supports are a major driver of shortfalls,” says Spencer Look, associate director of retirement studies at Morningstar Retirement. “They can be really catastrophic if you’re in there for more than a couple years. And even then, for some people with less savings, even one year could be a really, really big burden that can be hard to handle.”

Expenses tend to decline throughout retirement, Look says, with the exception of those who need long-term care, which can include part-time aides, live-in nurses, assisted living facilities or full-time nursing homes. For people who need that type of care, either due to physical or cognitive decline, expenses tend to spike — a pattern of spending known as the retirement “smile.”

While this convention won’t prove true for everyone, it’s worth reckoning with how you plan to cover the costs should you need some form of long-term care, says Christine Benz, director of financial planning and retirement and Morningstar and the author of “How To Retire.”

“Long-term care costs are completely outside of our health-care system. They’re not covered by Medicare. So people see them as a huge risk factor — the thought that they might have these catastrophic expenses late in life,” she says. “And I do think it’s helpful in terms of allaying that anxiety to get some kind of a plan.”

How much you might end up paying for long-term care will vary depending on where you live and the type of care you need. But no matter which way you slice it, it’s likely to be pricey.

An annual stay in an assisted living facility comes with a median price tag of $64,200, according to Genworth’s 2023 Cost of Care Survey. The median annual cost for a home health aide is $75,504, and a private room in a nursing home will run you $116,800.

To plan for such costs, you’ll have to figure out which of three categories you fall into in terms of how you’ll pay, Benz says.

1. Family care or Medicaid

The majority of Americans who need long-term care either rely on family members, such as adult children, to pay for it, or have it covered by Medicaid. Of the nearly $600 billion in Medicaid spending in 2020, more than 30% went to long-term care expenses, according to the Centers for Medicare and Medicaid Services.

Medicaid is a needs-based health-care program, and eligibility requirements to receive long-term care under the program vary from state to state. For 2024, these often include an income limit of $2,829 per month and an asset limit of $2,000, excluding your primary home, according to the American Council on Aging.

For some Americans who would otherwise fail to qualify, it’s possible to manage your assets in order to be eligible for care when you may need it. But that’s “not an ideal situation,” says Benz. You may not be able to choose where you receive your care. And for some couples, it may mean impoverishing a well spouse in order for the ailing spouse to qualify.

2. Paying with savings

On the other end of the spectrum, some retirees are wealthy enough to set aside significant cash that they earmark for long-term care.

“This would be for people with larger portfolios,” says Benz. “You might think about the average duration of long-term care along with the average costs to build a long-term care fund.”

For men who need it, the average duration of long-term care is 2.2 years, according to the Administration for Community Living. For women, it’s 3.7 years.

Do the math based on the costs, and you’ll likely have to plan for a six-figure bill, at least.

For this reason, many financial planers build a large cushion in their models for what clients can spend.

“We don’t build a plan that only works based on certain assumptions,” says Yusuf Abugideiri, a certified financial planner and chief investment officer at Yeske Buie in Vienna, Virginia. “We assume that what clients can spend is going to get spent.”

3. Long-term care insurance

The middle path involves buying insurance designed to help pay for long-term care. This can include long-term care insurance or whole life insurance with a long-term care rider. The latter have become a trendy option among those who are hesitant to pay premiums toward a form of insurance they very much hope they’ll never have to use, says Benz.

“Those products have become more popular because they offer kind of a level of optionality, where if you don’t need long-term care, you at least have that life insurance benefit,” she says.

They also tend to be somewhat easier to qualify for than traditional long-term care insurance, which may be tricky to obtain if you have certain pre-existing conditions.

Generally speaking, you’re better off buying a policy sometime in your 50s or earlier, which will help lower your premiums and lessen the probability that a health issue could arise that would disqualify you for a policy.

No matter when you buy a policy, the cost is likely to be pricey. A couple, both age 55, with a total of $800,000 for long-term care coverage through age 85 could expect to pay around $5,000 a year in premiums, according to the American Association for Long-Term Care Insurance.

The cost is often significant enough that it’s worth discussing with your loved ones whether a policy is worth it, says Gerika Espinosa, a CFP with DMBA in Salt Lake City, Utah.

“I’ll tell clients, either you need to have that conversation now with your spouse or your kids, saying, ‘Are you wanting more assets in retirement, or are you wanting to help take care? What does that look like?'” she says.

No matter which strategy you opt for, you’d be wise to discuss your options with both your loved ones and a financial professional.

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