TIME Retirement

Americans Are Totally Unprepared for This Shock

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Simon Critchley—Ikon Images/Getty Images

Never mind saving for retirement: Americans today face the bleak prospect of poverty in their golden years because they have no idea how much nursing homes cost and they wildly underestimate how much they’ll need.

In a new survey by MoneyRates.com, 40% of respondents say they’ve set aside nothing — zilch — towards paying for the care they’ll most likely need in their final years.

“Over two-thirds of individuals who reach age 65 will need long-term care services during their lifetime,” the Centers for Disease Control and Prevention warns.

Two-thirds of survey respondents have less than $75,000 saved. More than half think $75,000 is more than they’ll need for a year in a nursing home, but they could be in for a rude awakening: The average cost for a semi-private room in a nursing home is more than $81,000 a year, and that can soar to nearly $142,000 in pricey locations like New York City.

“It’s scary how quickly nursing care can run through your savings,” says Richard Barrington, senior financial analyst for MoneyRates.com. Barrington says even people who think they’re being diligent about saving for their retirement years can be led astray by the assumption that they’ll be able to live on less money after they exit the workforce.

“You may have a fair amount of discretion in the early years of your retirement, but then your financial needs may accelerate sharply,” he says. “People need to plan their savings and conserve their resources accordingly.”

A new brief from Boston College’s Center for Retirement Research illustrates what happens when people fail to plan for this possibility. It finds that even high-income retirees run out of money and need to use Medicaid to cover nursing home care.

“Medicaid… serves not just the poor, but also relatively well- off retirees impoverished by costly medical expenses,” the brief says, an outcome that has serious implications not just for these people, but for their heirs.

The eligibility rules for Medicaid are strict, with a cap of only $2,000 on what are termed “countable assets” and a five-year lookback period that essentially forces people to burn through the wealth they’ve accumulated. The government says about half of people who enter nursing homes start off paying for it themselves, but many of them spend down their assets — leaving little or nothing for their heirs — and end up on Medicaid.

The Boston College researchers looked at single seniors by income group as they aged and tracked who was covered by Medicaid. While Medicare covers all Americans once they hit the age of 65, the coverage doesn’t cover long-term care like nursing homes. For people without enough savings or who didn’t plan ahead and take out a long-term care insurance policy, the high cost of nursing homes can force even well-off seniors into poverty, at which point they’re eligible for Medicaid, which does cover nursing home care.

Although the percentage of high-income elderly who get Medicaid assistance starts out at zero when they’re 60 years old, it climbs steadily as they age, and around 20% of this population needs and qualifies for Medicaid by the time they hit their late 90s. “Higher income retirees… tend to live longer and face higher medical needs in very old age, which can result in them ending up on Medicaid,” the brief says.

Granted, many don’t live that long, but Americans are experiencing longer retirements and life spans. The CDC says the number of people 85 and older will rise from about 6 million in 2015 to almost 18 million by 2050.

“Medicaid is a safety net and it’s great that it’s there, but… you have to understand it’s likely to limit your options,” Barrington says. “If you want to leave behind any kind of legacy to your heirs or to charity, if you end up going on Medicaid, you can essentially forget about it.
A 2012 study by the Employee Benefit Research Institute found that people who lived in a nursing home for six months or more had median household wealth of only about $5,500. “For nursing home entrants, median housing wealth falls to zero within six years after the initial nursing home entry,” the study says.

“That safety net does come with strings attached,” Barrington cautions. “It’s going to sharply limit what you’re able to pass on.”

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