Planning for medical and long-term care costs as clients age
by Sheila Jelinek & Robert Eaton, FSA, MAAAMs. Jelinek is an external portfolio consultant for Milliman Financial Risk Management. She has spent over two decades in the financial services industry, focusing specifically on retirement income planning. Mr. Eaton is a principal and consulting actuary with Milliman, specializing in long term care and life insurance. He is a product manager for Milliman’s LTC Advanced Risk Analytics product. Visit www.us.milliman.com.
There are plenty of jokes about why women outlive men. Regardless of the reason, here is the reality: In the United States, females typically live longer than their male counterparts, and that longevity has increased over the decades. In 1930, life expectancy at birth was only 58 for men and 62 for women, and the retirement age was 65. According to Harvard Health, the current life expectancy of 73.2 for men and 79.1 for women represents a “long-apparent, significant gap.” While increased longevity may be viewed as a positive, it may also come with several financial challenges.
Thus, there is one very important challenge in particular: As women live longer, how can they better understand whether they will have enough retirement income to cover medical and long-term care (LTC) expenses?
Saving Less During The Working Years
Just as the longevity gap affects how much women need to save, the pay gap has had a significant impact on how much they have been able to earn. In 2020, women made only 84% of what men did, according to a Pew Research Center analysis of median hourly earnings of both full-time and part-time workers. That means lower Social Security benefits and less money to contribute to retirement accounts.
Women seemed on track to reverse that trend as this decade began. More college-educated females were in the workforce and more women were entering the C-suite—but then the COVID-19 pandemic hit. While all women were affected to some degree, according to McKinsey & Company three major groups experienced some of the largest challenges: working mothers, women in senior management positions, and Black women. The impacts included having to downshift their careers, exit the workforce, or take on the “second shift” of caring for loved ones. These effects have resulted in significant consequences.
The “Sandwich Generation”—adults caring for both children and aging parents—was particularly affected, as they struggle to balance their job and family commitments. According to a T. Rowe Price study:
- More than a third of parents with children ages eight to 14 also care for an aging family member
- Nearly one-third of dual caregivers spend over $3,000 a month on an aging parent or relative
- Seventy-four percent of dual caregivers feel a financial strain
- Dual-caregiving parents are more likely to carry a credit card balance and have balances over $5,000
- Dual caregivers are more likely to have withdrawn money from retirement and college savings accounts
This tension is likely to get worse as the aging population grows and life expectancies continue to increase. According to U.S. Census Bureau projections, by 2030 there will be more than 70 million Americans over the age of 65.
These combined pressures—of fewer working years, smaller salaries, and reduced savings—increase the likelihood that women will not have enough income in retirement.
Spending More On Healthcare In Retirement
In addition to starting with less money, women are typically likely to live longer—meaning they will face greater expenses as they age. Specifically, healthcare costs can be one of the largest expenses in retirement, so it is crucial that they be addressed as part of a comprehensive financial plan.
The 2022 Milliman Retiree Health Cost Index projects the total premiums and out-of-pocket expenses that a healthy 65-year-old can expect to spend in retirement on medical and prescription drug costs under the two most common health insurance pathways chosen by Medicare-eligible retirees. (The report focuses on the cost variations between Original Medicare plus Medigap and Part D compared to Medicare Advantage + Part D, along with variations across sex and geography.)
The chart in Figure 1 illustrates the differences in lifetime costs and present-day savings needed for females compared to males.
As we can see, due to their longer life expectancy, women need to budget for higher healthcare costs in retirement.
A Greater Need For Long-Term-Care
Compared to men, women are more likely to use formal long-term care (LTC) services later in life. Individuals typically need long-term care in their later years, when they start to require assistance with activities of daily living, due to physical and/or cognitive decline. According to recent actuarial studies, women may receive almost twice as many LTC benefits from private LTC insurers than men do.
Women’s greater LTC utilization is in part due to their longevity, and also the result of social norms: Women often perform caregiver roles near the end of a spouse’s life, avoiding the need to hire formal, paid caregiving for their spouses.
Once women begin to receive paid long-term care for themselves, actuarial studies show they need care for longer on average. In part this is genetic: Women’s bodies live longer than men’s in general, and they live longer under frail conditions as well. The average length of a private long-term care insurance claim for an 87-year-old woman receiving care in her home is 2.2 years, while men average 1.6 years under similar conditions.
The cost of needing long-term care is high. Recent studies of industry cost information show the 2021 median annual home health aide cost for someone receiving long-term care is $61,800, and the 2021 median annual cost of a private nursing home bed is $108,400. Costs for long-term care services may rise between 2% and 6% per year (varying by the type of LTC services that are received). For home health services, the recent trend has been even higher.
Careful Planning Is Vital For Women
According to the U.S. Census Bureau, an estimated 10,000 Baby Boomers are turning 65 each day. By 2030, all Baby Boomers will be age 65 or older. This growing senior segment of the population will have an increased need for care, along with increased healthcare costs and long-term care needs and expenses.
For those nearing retirement age, another significant factor in healthcare cost planning is inflation, which has risen significantly since the pandemic, reaching highs not seen since 1981.
Beyond driving up the cost of basic necessities—a concern for retirees on a fixed income—healthcare costs have been affected by inflation as well. The average price of healthcare in the United States increased 5.0% in the 12 months ended September 2022, after rising 1.3% the year before. While this jump was not as dramatic as overall inflation, it should be noted that rising healthcare costs are an added expense that must be factored into the financial planning process.
Including healthcare costs in a comprehensive financial plan can help address the longevity challenge. Estimating future healthcare and long-term care expenses and implementing solutions to pay for these future expenses may increase the likelihood of not outliving income in retirement.
Advisors should also consider additional longevity challenges specific to women, such as planning for the time when a partner passes. It’s vital to consider:
- When to take Social Security
- What Social Security options are available for the surviving spouse
- Life insurance proceeds
- Medicare costs and options
Education, planning, and plan reviews are steps that can help advisors and their clients feel more confident about retirement and longevity.
 Social Security. Social Security History: Life Expectancy for Social Security. Retrieved November 20, 2022, from Https://www.ssa.gov/history/lifeexpect.html#:~:text=Life%20Expectancy%20for%20Social%20Security&text=Life%20expectancy%20at%20birth%20in,the%20retirement%20age%20was%2065.
 Shermling, Robert H. (October 20, 2022). Why life expectancy in the U.S. is falling. Harvard Health Publishing. Retrieved November 20, 2022, from https://www.health.harvard.edu/blog/why-life-expectancy-in-the-us-is-falling-202210202835.
 Barroso, Amanda, & Brown, Anna (May 25, 2021). Gender pay gap in U.S. held steady in 2020. Pew Research Center. Retrieved November 20, 2022, from https://www.pewresearch.org/fact-tank/2021/05/25/gender-pay-gap-facts/.
 McKinsey & Company (March 8, 2021). Seven charts that show COVID-19’s impact on women’s employment. Retrieved November 20, 2022, from https://www.mckinsey.com/featured-insights/diversity-and-inclusion/seven-charts-that-show-covid-19s-impact-on-womens-employment.
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 T. Rowe Price (March 26, 2019). Sandwich Generation Strain Negatively Impacts Kids and Their Money Habits. Press release. Retrieved November 20, 2022, from https://www.troweprice.com/corporate/us/en/press/t–rowe-price–sandwich-generation-strain-negatively-impacts-kid.html.
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 According to the Milliman 2020 Long-Term Care Guidelines, women between ages 65 and 95 incur approximately 5% to 12% more long-term care insurance claims than males of similar ages. Because there are more women than men at those older ages, an even greater portion of total long-term care claimants are women.
 According to summary data from the Milliman 2020 Long-Term Care Guidelines.
 Genworth (2021). Cost of Care Survey. Retrieved November 20, 2022, from https://www.genworth.com/aging-and-you/finances/cost-of-care.html. Note that home health aide spend is “full-time” based on 44 hours per week and 52 weeks per year.
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 U.S. Inflation Calculator. Healthcare inflation in the United States (1948-2022). Retrieved November 20, 2022, from https://www.usinflationcalculator.com/inflation/health-care-inflation-in-the-united-states/.