Retirement conundrum: crippling health care costs or start dumping assets?

Millions of Americans are facing a challenging decision about their retirement that could include spending-down their assets.

Research published this week reveals that 60% of investors who took part are considering whether reducing their assets to a level where they would qualify for Medicaid would be a better option than risking high long-term health care costs.

The survey from Jackson National Life Insurance Company found that almost two thirds of pre-retired respondents are underestimating both the cost and the likely requirement of health care in retirement.

They were at least $1,220 below the annual average estimated cost of $8,600; and while just 27% believe they will need long-term care in their lifetime, data from Morningstar in 2023 showed that this is a reality for 70% of those turning 65 each year. These two elements are exacerbated by previous Jackson research that showed most investors underestimate their life expectancy.

Meanwhile, two in five financial professionals who participated in the poll are concerned that clients will be unable to afford acceptable care, with 56% citing this as a major risk for retirees.

Added into the mix is the fact that new innovations in health care are adding to the potential cost in the years ahead. The research cites data showing a 120% increase in the price of medical care including services, insurance, drugs and equipment since 2000.

While spending-down assets to be eligible for Medicaid, the report highlights that many who would consider this dramatic route are unprepared for what that would mean for their retirement finances and lifestyle.

There is also the all-too-familiar gender inequality, with women more likely to have lower income and asset levels, but more likely to be caregivers for family members. They are less likely to believe they will need long-term care but expect to live longer than men.

“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. “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."

The research was conducted in partnership with the Center for Retirement Research at Boston College.

“These new survey data should be a wakeup call for policymakers, financial professionals and older Americans themselves,” said Andrew Eschtruth, director of the center. “We are particularly concerned that too many people nearing or in retirement don’t have a good grasp of their potential healthcare needs and out-of-pocket costs, which could narrow their options when it comes time to pay the bills.”