Financial advisors have been warning clients for decades that one major risk they face is long-term care expenses.
U.S. consumers who listen to any financial advice at all have remembered that message.
When Lincoln Financial surveyed 1,991 U.S. adults ages 18 and older in mid-2020, 44% said they were not prepared to handle long-term care or elder care issues.
The survey participants were more worried about long-term care expenses than they were about income taxes, inflation or longevity risk.
Now, some analysts are pushing back and wondering whether the warnings advisors are giving consumers reflect the actual level of long-term care risk, or whether this is a case of intentional or unintentional fear marketing.
Sudipto Banerjee, vice president of Retirement Thought Leadership at T. Rowe Price, for example, recently published an analysis suggesting that, although planning for long-term care costs makes sense, catastrophic out-of-pocket spending at the end of life is unusual.
"Even though there is an increase in health care expenses late in life, very few of those who aren't already under Medicaid are likely to run out of money as a direct result of health care costs," Banerjee concludes in his analysis.
What It Means
Assessments of your clients' long-term care risk are complicated and based on complex data sets and statistical modeling tools.
Thinking in this area could evolve quickly as clients in the huge baby boomer generation head toward age 85 and reach the "old old" stage of life.
The Players
Congressional Budget Office analysts have assessed U.S. long-term care spending trends when helping Congress assess public and private LTC benefits proposals.
Banerjee published his skeptical assessment of long-term care risk in an analysis of older people's spending on acute health care and long-term care life, after age 65, and in the last two years of life.
Richard Johnson and Melissa Favreault, senior fellows at the Urban Institute, analyzed the effects of serious long-term care needs on relatively affluent people's level of economic hardship in a 2021 paper prepared for a planning office at the U.S. Department of Health and Human Services.
Total Long-Term Care Spending
In 2013, the Congressional Budget Office published a chart showing low-range, mid-range and high-range forecasts of how long-term care spending might change, as a share of U.S. gross domestic product, from 2010 through 2050.
In 2020, actual U.S. LTC spending amounted to about $300 billion, or 1.35% of GDP, according to the latest National Health Expenditures report.
One sign that LTC expenses may be reasonably stable is that the percentage of spending going to LTC expenses was down from 1.4% of GDP in 2010.
The actual 2020 LTC spending figure, as a percentage of GDP, was at the level predicted by the CBO's optimistic LTC cost forecast scenario.
The Banerjee Analysis
Banerjee used data for 1992 through 2016 from a large, well-established University of Michigan survey series, the Health and Retirement Study program.
He calculated the odds that Americans who were 65 or older, who were not enrolled in Medicaid, and who were in their last two years of life would have very high acute health care and long-term care expenses.
He also calculated how those people's end-of-life care expenses compared with their net worth.
He found that older people who were not on Medicaid were unlikely to have end-of-life care expenses that amounted to more than 60% of their total net worth, including home equity.
Care costs amounted to 67% of total net worth for the top 5% of spenders in the 85-89 age group; 119% of net worth for the top 5% of spenders in the 90-94 age group; and 150% of net worth for the top 5% of spenders in the 95-99 age group.
