Introduction
Households approaching retirement should account for all kinds of dangers to their monetary safety. They might reside longer than deliberate and deplete their sources; they might expertise unexpectedly excessive inflation; or they might obtain unusually poor returns on their investments. Equally consequential is the chance that main bills to make sure their bodily well-being will drain their sources.
On this paper, we use “healthcare” to discuss with any health-related prices, whether or not they contain periodic medical care or long-term care (LTC). Medical and LTC dangers could be substantial in retirement. Every, nevertheless, has totally different implications for retirement planning. Each dangers have two parts – particular person threat and basic worth threat. The person threat is the chance {that a} retiree will truly face a medical shock or want LTC. The overall worth threat is the chance that costs for healthcare providers will develop significantly, eroding an individual’s retirement revenue over time. The distinction between these two parts is that particular person threat can, theoretically, be insured by threat pooling, whereas basic threat impacts everybody and thus can’t be dealt with by pooling. Because the uninsured parts of those dangers could be substantial, households’ perceptions of the dangers have essential implications for a way they plan their spending in retirement.
Utilizing two new surveys of older households and monetary advisors, this paper examines how households’ perceptions of their healthcare dangers in retirement may differ from the precise dangers they could face. The family survey captures the extent to which older households are anxious about healthcare dangers in retirement, their evaluation of how a lot healthcare shocks might price, and the way they plan to handle these dangers. The advisor survey assesses how involved advisors are concerning the healthcare dangers their shoppers might face, together with the related prices. The survey additionally asks what advisors advocate their shoppers do to handle these dangers and their views on varied contingency methods ought to their shoppers run out of cash.
The outcomes present that older households are likely to underestimate their healthcare dangers in retirement and have little or no sense of how a lot medical shocks or LTC assist providers might price. Many additionally imagine reducing again on non-essential spending, equivalent to journey, shall be sufficient to cowl the prices or that Medicaid will step in for them. Advisors, however, are extra anxious than their shoppers about healthcare dangers as a result of they’ve a greater sense of the prevalence and the prices of medical shocks and LTC assist providers. Curiously, older households who work with advisors don’t have a significantly better sense of their healthcare dangers or prices. Questions for future analysis embody why advisors have little influence on their shoppers’ perceptions and the way inaccurate perceptions have an effect on their shoppers’ retirement safety.