Do retirement investors accurately perceive healthcare risks, and do advisors help?

Abstract

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.