An analysis of data by the Center for Retirement Research at Boston College concluded that many retirees are unprepared to meet the costs associated with long-term care. Using data from the Health and Retirement Study (a long-term national survey of Americans over the age of 50) and a 2024 survey of people between the ages of 48 and 78, the researchers examined the choices that retirees make when they are confronted by unexpected health care expenses.
The researchers focused on retirees who have at least $100,000 invested in assets. They found that those retirees are typically able to weather the storm when confronted with short-term medical expenses. Retirees who have saved money do not generally need to tap into those retirement assets to pay unexpected medical bills. Instead, they rely on Medicare to pay most of their treatment costs and supplemental insurance to pay for prescription drugs and cover deductibles.
Retirees who can pay for short-term medical care may be in a different position when they suffer from a long-term disability. The researchers found that retirees often overestimate their ability to meet the expenses of long-term care.
The Medicaid Fallback
Medicare provides a vital safety net for retired Americans. Yet Medicare does not cover the expense of long-term care. Retired Americans who need help with their activities of daily living often have little choice but to rely on unpaid services provided by family members who act as caregivers.
When family caregivers are unavailable or care needs are greater than family members can provide, retirees must use their savings, investments, and home equity to pay for long-term care in assisted-living facilities or nursing homes. It doesn’t take long for middle class retirees to exhaust those resources. When they have few assets left, they may turn to Medicaid, a state-administered program that provides health care to individuals with very low incomes.
Medicaid may be a fallback for retirees who need long-term care, but reliance on Medicaid is far from ideal. Medicaid typically covers the cost of nursing home care, although most retirees must exhaust their personal resources before they become eligible for Medicaid coverage. Still, Medicaid usually covers 100% of nursing home costs for eligible seniors.
Medicaid is a less reliable means of funding a stay in an assisted-living facility. In most states, Medicaid covers at least some costs of caregiving (but not room and board) that is provided in an assisted-living setting. Retirees who are eligible for Medicaid and who live in a state that covers institutional caregiving expenses may need to depend on contributions from family members, long-term care insurance, disability benefits, veterans benefits, or other resources to cover the costs of room and board and other expenses that are not paid by Medicaid.
Misconceptions About Payment for Long-Term Care
The Center for Retirement Research analysis found that long-term care risks are typically low on the list of seniors’ concerns. That finding might be surprising, given that 80% of people who have reached the age of 65 will require long-term care at some point in their lives, while nearly 20% will require care for more than three years.
Based on responses to survey questions, the researchers found that older adults tend to underestimate the risks and costs of long-term care. As a consequence of their distorted risk assessments, older adults tend not to save the money they will need to pay for long-term care.
When survey participants were asked how they would pay for long-term care if they lacked the financial resources to do so, more than 60% said they would consider spending down their resources and relying on Medicaid, while less than 30% said they would consider using their home equity or moving in with their children. The researchers then consulted the Health and Retirement Study to determine whether those expectations align with how seniors actually meet their long-term care needs.
The Health and Retirement Study found that few households have long-term care insurance, in part because the policies are expensive and few companies sell them. Given the limits that most policies impose on coverage, even households that invested in long-term care insurance may find that they cannot pay for long-term services after exhausting their benefits.
The study also found that most retirees who own assets valued at $100,000 or more find it difficult to spend down their assets so that they will qualify for Medicaid. Spending down assets is inconsistent with the competing desire to leave a meaningful inheritance for children.
Only 15% of seniors who have more than $100,000 in assets actually spend down their assets sufficiently to qualify for Medicaid. The rest rely on a combination of care provided by relatives and drawing down their home equity to finance long-term care costs (such as wheelchair purchases) that require a cash outlay. Although most seniors expect to use Medicaid to pay for long-term care, middle class seniors usually find themselves relying on family members to provide unpaid care.
The researchers concluded that the study “results speak to the relative lack of protection retirees have” against the financial shock of long-term care needs. Older adults who understand that data may need to reevaluate their plan for addressing care needs when they arise. As the CEO of investment management firm BlackRock warns, Americans are facing a retirement crisis because they aren’t saving enough — and because Social Security alone is not always sufficient to keep retirees from living in poverty.