The Retirement Crisis Nobody Talks About: Long-term Care

When you try to gauge the biggest risks to your financial security in retirement, health care costs usually top the list. But there's even bigger danger that doesn't get as much attention: long-term care costs.

By whatever measure you use, many Americans aren't saving enough for retirement. In its latest annual retirement readiness study, the Employee Benefit Research Institute found that some 57% to 59% of Baby Boomer and Gen X households are on track to retire comfortably. But if you factor in long-term care costs, the percentage of households running short of money in retirement soars by 100% or more after 20 years for those in middle-class or upper-income quartiles, according to new study by EBRI. The analysis assumes that Baby Boomer and Gen X households will retire at 65 and spend average amounts for food, housing and other living expenses, in addition to long-term care costs.

The risk of falling short financially is highest for those in the lower-income quartile—by the 10th year of retirement, some 70% in this group would have run short of money, according to EBRI, though the majority were already headed for trouble because of lack of savings. But even households in the highest-income quartile saw the percentage falling short reach 8% by the 20th year of retirement vs. just 1% without accounting for long-term care.

If you become disabled, the costs of assistance with daily living tasks (what's commonly referred to as long-term care) aren't generally covered by Medicare. That's something many people don't realize. A nursing home in the Midwest might run you $60,000 a year, while the median salary for a home health aide may be $45,000 annually. Some 70% of Americans age 65 and older are expected to need long-term care at some point in their lives. And studies have found that many families end up paying huge amounts out of pocket, as much as $100,000 in the last five years of life.

Planning ahead can help, but unfortunately there are few solutions to the long-term care dilemma. One alternative is to purchase long-term care insurance, but it's pricey, so few can afford it. "Long-term care insurance is something that nobody wants to buy and the insurance industry doesn't want to sell," says Howard Gleckman, senior fellow at the Urban Institute and author of "Caring for Our Parents." In recent years, many insurance companies have raised premiums on long-term care policies. And other insurers have gotten out of the business—that's mainly because fewer buyers than expected are dropping policies, and low interest rates have reduced profits.

Another option is Medicaid, which many seniors end up relying on to pay for long-term care. But in order to qualify you will have to spend down most of your assets—not anyone's idea of a dream retirement. And as more aging Boomers and Gen X retirees require care, Medicaid programs will come under increasing financial pressure, Gleckman says, so it's not clear what the programs will provide in 20 years.

Until more options develop—perhaps some kind of private-public partnership for long-term care—your best strategy is to stay healthy, save as much as you can, and build a community network. People with strong social ties, research shows, live longer, happier lives.

This article was updated to clarify the percentage of households facing shortfalls in retirement due to long-term care costs.