Morningstar research puts retirement shortfall risk at 40%-45%

Research for the Morningstar Center for Retirement & Policy Studies puts the share of the population at risk of a retirement shortfall at about 40% to 45%. Excluding long-term-care costs lowers that figure by about 25%, according to a Morningstar article published Oct. 18 that excerpts a conversation with two of the researchers on its The Long View podcast.

The article does not specify whether that 25% is a relative decline or 25 percentage points. A relative decline would leave roughly 30% to 34% of the population short; a 25-point decline would leave 15% to 20%.

Amy Arnott asked directly: how should an advisor build long-term-care costs into a retirement plan without understating the risk or assuming every retiree will face extremely high costs? Spencer Look's answer was scenario or sensitivity analysis rather than a single cost assumption — the same discipline this publication has argued belongs in decumulation modeling. The likelihood of needing care varies by person, by gender, by income level and by wealth, he said; one blended cost figure will overstate the risk for some clients and understate it for others.

Look's practical suggestion is to cost out the arrangements a client would actually prefer: nursing home care, home health care, other arrangements, and family support. Nobody knows in advance what type of care they will need, he said, but it is still worth having preferences on file and attaching dollar estimates to them. He suggested running the plan twice, with and without a care event, and showing the client both outcomes. “It's a tricky endeavor, but you kind of want to play around with the different levers and understand what the cost could be,” Look said.

He also flagged Medicaid spend-down as a live path rather than a theoretical one. In practice, he said, a lot of people do spend down to Medicaid, and thinking that through against a client's wealth level is part of the job. He described spend-down strategy as a dedicated specialty within planning and called the area tricky.

The center has a study in progress on long-term-care insurance, including combination products — whole life or universal life carrying a long-term-care component, or an annuity with one. Look gave no publication date, and the excerpt states no findings.