Morningstar Urges Advisors to Plan for Health, LTC Costs

Morningstar Investment Management analyzed transaction data from thousands of Americans and found that necessary, non-discretionary expenses typically shrink in dollar terms during retirement but take up a larger share of income. For a person with average income, those essential costs rise from about 40% of income before retirement to about 60% in retirement. Morningstar recommends advisers incorporate that shift into retirement-income planning and test plans against higher-cost scenarios.

The research advises advisers to secure predictable income for basic outlays and to keep liquid reserves for unexpected health and housing costs that often occur later in life. Recommended steady income sources include guaranteed annuities, pensions and other predictable payments, while savings or liquid accounts can cover sudden needs.

Morningstar provides age-based health-cost benchmarks: about $1,000 a year at age 25, roughly $3,600 by the time someone reaches retirement, and around $5,000 in the first decade of retirement before costs stabilize. The firm cautions that relying only on average estimates can leave clients exposed if they experience a health-care shock or require extended assisted living.

Long-term care represents a large variable in retirement budgets. Needs for assisted living or skilled nursing can last for extended periods, and prices vary by state and level of care. Morningstar notes that long-term care insurance can offset some expenses but can be costly and its value depends on an individual’s situation and local pricing.

Spencer Look, associate director of retirement studies at Morningstar Investment Management, emphasized that more detailed and realistic expense estimates improve planning outcomes and that planning for health-care shocks is difficult because average costs can understate or overstate an individual’s needs.

Mark Parthemer, chief wealth strategist at Glenmede, said financial anxiety appears across wealth levels and that clear budgeting and planning can reduce that worry. He described clients with large portfolios who nonetheless fear running out of money and recommended advisers address those concerns through concrete budgets and scenario testing.

Morningstar’s researchers wrote that advisers should prepare plans that account for both average expected costs and less likely but plausible high-cost outcomes, and to communicate the limits of predictability for health and long-term care needs. They urged advisers to stress-test retirement plans even while clients’ incomes are rising to limit the risk of future shortfalls.