Study: Trouble Ahead for Retirees

As if decimated portfolios weren’t hard enough on investors, a new study released Tuesday indicates that even before the crash, a far higher percentage of folks were at risk for not having enough money for retirement than previously predicted.

The study from Boston College’s Center for Retirement Research revises what’s known as the “retirement risk index” — basically the percentage of people who won’t be able to maintain their standard of living in their golden years — to take into account the cost of traditional health care as well as long-term care like nursing-home stays and home health aides. The revised calculations indicate that almost two-thirds of working-age Americans were already falling short of retirement targets in 2007, up from the 44% researchers had reported in a study just 19 months ago.

The study seems to confirm the warnings of some experts that even before the crash the picture was darkening for many retirees — and that health-care costs were largely to blame. In recent years, medical costs have risen so fast that Fidelity Investments estimated the average 65-year-old couple retiring in 2008 would need $225,000 out of pocket just to cover their basic health needs in retirement. Meanwhile, private rooms in nursing homes have become 17% more expensive since 2004, reaching about $76,000 a year on average in 2008, according to Genworth Financial.

“Those in the middle of the pack economically can be dramatically squeezed by these costs,” says Anthony Webb, a co-author of the study. That’s because those folks are too rich to qualify for Medicaid, which would pick up the nursing-home expense; Medicare, the health insurance program for seniors of all income levels, typically doesn’t cover it.

Despite the alarming numbers, financial planners say retirees and future retirees can take steps to help insulate themselves from expensive late-in-life care. Long-term-care insurance, for example, will often pick up the tab for both nursing homes and home health aides, which typically cost about $20,000 a year. Premiums for long-term-care insurance averaged close to $2,000 in 2008, but they can be much higher for people who have health problems or are close to retirement.

Timothy Maurer, director of financial planning for the Financial Consulate, a planning firm in Lutherville, Md., says many of his clients will also opt to use their home equity as a down payment for a retirement community. Many of those facilities charge seniors set, locked-in monthly dues that cover the cost of any nurses needed to help with members’ care.

But experts caution there’s no one solution for everyone. Some advisors will create a “long-term-care plan” for clients to determine if factors like family health history and relative wealth make long-term-care insurance a good investment, since only about a third of seniors will wind up spending one month or more in a nursing home. Maurer says he urges many upper-middle-income clients to get partial long-term-care insurance and then partially self-fund the rest of any needed medical assistance.

And since the industry has been hit with financial-strength rating downgrades in recent months, doing homework on the insurer you choose is critical, says Jeff Camarda, a financial advisor in Fleming Island, Fla. Companies like A.M. Best and Standard & Poor’s regularly rate the insurers based on their financial strength, and Camarda urges clients to consider only top-rated insurers.