Do Retirees Accurately Assess Their Long-Term Care Risks?
I recently met with a client whose close friend had just lost a parent after a 7+ year battle with dementia. Their friend had spent countless hours personally caring for their parent before hiring care and spending several hundred thousand dollars. It got them thinking about their care later in life and whether we had allocated enough funds for those expenses.
I’ve also met with plenty of retirees who don’t have a plan for long-term care and haven’t given it much thought. There can be risks with planning too much or too little. If you fear the worst-case scenario, you’re more likely to underspend in retirement by putting away too much money for a low-probability event. If you don’t plan at all, you could put your spouse, children, or family members in a challenging position later on.
Long-term care (LTC) is a critical component of retirement planning, yet many retirees may not fully grasp the likelihood or implications of requiring such care. A recent study by the Center for Retirement Research at Boston College compared individuals' perceptions of their LTC needs with objective assessments.
How Likely is Care?
The study highlights that over half of older adults (52%) will require high-intensity LTC, defined as needing help with two or more activities of daily living or having an Alzheimer's/dementia diagnosis.
Since most should be concerned about high-intensity care, let’s focus on that. About half of all retirees will need at least some care—about 14% for less than a year, 20% for 2-3 years, and 18% for 3+ years.
Perception vs. Reality
The research reveals a significant gap between perceived and actual LTC risks. Many individuals underestimate their chances of needing intensive care. Conversely, as mentioned earlier, overestimating these needs might result in unnecessary financial conservatism, limiting quality of life during retirement. Interestingly, people seem much more likely to underestimate the likelihood of ending up in a nursing home (29% said they would vs. 52% that do), while they overestimate the likelihood of severe cognitive impairment (52% said they would vs. 29% that do). The author suggests this may be due to the bias of people not wanting to end up in a nursing home and the expectation that they can manage cognitive decline from home, both of which may not be true.
How Care Happens
Given the substantial costs associated with LTC and the asset limitations to qualify for Medicaid, the most common method of care is informal and unpaid family care. 33% of care is provided by a child, 17% by a spouse, and 14% by other relatives or close acquaintances. Medicaid covers another 22% of all care. This leaves 14% being paid by the person receiving care through their own funds or long-term care insurance. While we don’t have the data on this, as income and assets go up, the percentage of care paid by the person also increases.
Some takeaways
About 50% of all retirees will need high-intensity care, and 38% will need it for more than 1 year. Given the high cost of long-term care insurance, you likely will not get out what you paid into it, unless you need care for close to a year or more. For that reason, I think long-term care insurance is worth seriously considering. Still, it’s also okay to plan in other ways, such as setting aside a portion of your investment assets for these possible expenses.
Given that only 18% of all retirees need care for 3+ years, I think planning for 3 years of care is a reasonable starting point. Costs vary by location, but as of 2025, the national average is about $100,000-$120,000/yr. Keep in mind that when receiving this care, many other expenses drop off, especially if you are single or widowed. Some may need much less care, while others may require substantially more. Family history and your health play a big role in this decision.
If you don’t set aside funds for this, know what your other options are likely to be. Many retirees can’t imagine having their children care for them. But the data tells us a different story — it’s the most common form of care.
Accurate self-assessment of long-term care risks is essential for effective retirement planning. Given this data, consider whether you have generally under- or overplanned for this expense and what your planning options are for the future.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.