Rising Health Care Costs for Retiring Americans: A Growing Risk

Retiring Americans face significant health care costs, with average expenses including nursing home care totaling $260,000, and potentially exceeding $500,000, according to a new study by the Center for Retirement Research at Boston College underwritten by Prudential Financial. The study, "What is the Distribution of Lifetime Health Care Costs from Age 65," found that 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. The study aims to quantify the magnitude and distribution of potential lifetime health care expenditure, highlighting the risk faced by American households of incurring exceptionally large health care expenses in retirement.

Key Takeaways:

• The average remaining uninsured lifetime health care expenditure for a typical married couple age 65 is $197,000, representing the present value of their premiums for Medicare and private insurance, out-of-pocket payments, and home health costs.
• When nursing home care is included, the amount for a typical couple increases to $260,000, with a 5 percent risk of exceeding $570,000.
• The main sources of retired households' health care cost risk are 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.
• The annual cost of a nursing home was about $71,000 for a semi-private room and $79,000 for a private room in 2008.
• Medicare pays for a maximum of only 100 days of nursing home care.
• Americans need to assess the possibility of incurring out-of-pocket health care costs that are significantly higher than average, as without managing this risk, households may have to either forego needed health care or rely on Medicaid.
• Although lifetime health care costs decline with age, they remain substantial, with couples facing an average remaining lifetime cost of $140,000 at age 85, and a 5 percent risk of exceeding $266,000 without nursing home care.
• Including nursing home care, the average cost for couples at age 85 is $203,000, with a 5 percent chance of exceeding $477,000.

Statistics:

• 5 percent of households approaching retirement in 2007 had accumulated enough financial assets to cover potential lifetime health care costs exceeding $311,000.
• Less than 15 percent of households had accumulated that much in total financial assets.
• $260,000: the average total health care cost, including nursing home care, for a typical couple age 65.
• $570,000: the amount for a typical couple age 65 with a 5 percent risk of exceeding nursing home care costs.
• $71,000: the annual cost of a nursing home for a semi-private room in 2008.
• $79,000: the annual cost of a nursing home for a private room in 2008.
• 100 days: the maximum amount Medicare pays for nursing home care.
• 5 percent: the chance of exceeding $266,000 in remaining lifetime health care costs without nursing home care at age 85.
• $266,000: the 5 percent risk of exceeding remaining lifetime health care costs without nursing home care at age 85.
• $477,000: the amount for couples at age 85, with a 5 percent chance of exceeding the total health care costs, including nursing home care.

Sources:

1. "What is the Distribution of Lifetime Health Care Costs from Age 65," Center for Retirement Research at Boston College underwritten by Prudential Financial.

2. Prudential Financial, Inc.

3. Managed Care Weekly Digest editors.