Will Long-Term Care Ruin Retirement Plans?

Abstract

Long-term care expenses represent a known unknown in retirement planning. A large majority of households will need some sort of long-term care support as they age, and costs for certain types of long-term care, like nursing homes, can run over USD100,000 per year. However, most families will not incur expenses of this order. Who is at risk?

We use a simulation-based framework to analyze how often long-term care expenses are likely to cause ruin in an otherwise prudently constructed financial plan. Our framework also enables us to estimate long-term care usage by type of service and calculate a distribution of total care costs for a particular household.

We find that roughly 85% of older couples will utilize long-term care. Long-term care expenses impact financial plan sustainability at a declining rate as wealth increases from $1 million to $10 million. At a portfolio value of $1 million, adding long-term care expenses to the simulation results in ruin (defined as depleting the portfolio entirely prior to the death of both members of the couple) about 30% of the time. With certain caveats discussed in the article, we estimate that failure rates increase by 9 percentage points for $5 million households, and increase by about 5 percentage points for $10 million households. We also find that female same-sex households are particularly at risk due to greater longevity and higher incidence of long-term care usage.

In summary, financial plans that do not incorporate long-term care expenses can significantly overestimate the long-term sustainability of the plan.