Do Retirement Investors Accurately Perceive Healthcare Risks, and Do Advisors Help?

Households approaching retirement must account for a wide variety of risks to their financial security.  They may live longer than planned and deplete their resources; they may experience unexpectedly high inflation; or they may receive unusually poor returns on their investments.  Equally consequential is the risk that major expenses to ensure their physical well-being will drain their resources.

In this paper, we use “healthcare” to refer to any health-related costs, whether they involve periodic medical care or long-term care (LTC).  Medical and LTC risks can be substantial in retirement.  Each, however, has different implications for retirement planning.  Both risks have two components – individual risk and general price risk.  The individual risk is the likelihood that a retiree will actually face a medical shock or need LTC.  The general price risk is the likelihood that prices for healthcare services will grow considerably, eroding a person’s retirement income over time.  The difference between these two components is that individual risk can, theoretically, be insured by risk pooling, while general risk affects everyone and thus cannot be handled by pooling.  Since the uninsured components of these risks can be substantial, households’ perceptions of the risks have important implications for how they plan their spending in retirement. 

Using two new surveys of older households and financial advisors, this paper examines how households’ perceptions of their healthcare risks in retirement might differ from the actual risks they might face.  The household survey captures the extent to which older households are worried about healthcare risks in retirement, their assessment of how much healthcare shocks could cost, and how they plan to manage these risks.  The advisor survey assesses how concerned advisors are about the healthcare risks their clients may face, along with the associated costs.  The survey also asks what advisors recommend their clients do to manage these risks and their views on various contingency strategies should their clients run out of money. 

The results show that older households tend to underestimate their healthcare risks in retirement and have very little sense of how much medical shocks or LTC support services may cost.  Many also believe cutting back on non-essential spending, such as travel, will be enough to cover the costs or that Medicaid will step in for them.  Advisors, on the other hand, are more worried than their clients about healthcare risks because they have a better sense of the prevalence and the costs of medical shocks and LTC support services.  Interestingly, older households who work with advisors do not have a much better sense of their healthcare risks or costs.  Questions for future research include why advisors have little impact on their clients’ perceptions and how inaccurate perceptions affect their clients’ retirement security.