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Retirement Planning > Retirement Investing

Center Adds LTC To Risk Analysis

By Warren S. Hersch

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Adding the projected cost of long term care to retirement risk calculations leads to a significant increase in risk estimates.

Researchers come to that conclusion in a new study released by the Center for Retirement Research at Boston college.

The researchers have added long term care cost estimates to their National Retirement Risk Index.

Adding the LTC component increased the risk index to 64%, from 61%, the researchers report.

The new index means that, according to the researchers’ calculations, 64% of households appear to be at risk of being unable to main pre-retirement non-health care consumption after retirement, the researchers write in the study.

When the researchers began adding projected acute health care costs to the index in February 2008, that increased the index to 61%, from 44%.

The researchers assume when computing the index that individuals in the households included will work to age 65 and annuitize all financial assets, including receipts from reverse mortgages on their homes.

The study was underwritten by a grant from a unit of Nationwide Mutual Insurance Company, Columbus, Ohio.

The amount of money people need while retired compared with what they need before they retire varies, but the researcher estimate most retirees need 65% to 85% of their pre-retirement income, depending on household income and marital status.

Most retirees need less than 100% of pre-retirement income because they tend to pay less in taxes and no longer need to save for retirement.

But the percentage is higher if the costs of health care and long term care are taken into account, the researchers write.

Alicia Munnell, director of the Center for Retirement Research, says the index risk estimate would be higher if it incorporated “realistic assumptions” about early retirement retirements, the reluctance of retirees to annuitize their 401(k) balances, and retirees’ reluctance to tap housing equity.

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