The Effect of the Risk of Out-of-Pocket Spending for Health Care on Economic Preparation for Retirement

After retirement, the primary sources of uncertainty with respect to an individual’s economic status are longevity, investment outcomes and out-of-pocket spending on health care. In previous work, we estimated economic preparation for retirement, taking into account the risk of living to an advanced old age and the concomitant risk of running out of resources. But while we accounted for the average level out-of-pocket spending for health care, we did not account for the risk of out-of-pocket spending. In this paper we augment our model for this omission. We find that the risk of out-of-pocket health care spending reduces economic preparation for retirement from about 72% of persons in the age range 65-69 to about 63%. However, this relatively modest reduction is quite unequally distributed: about 57% of single persons are adequately prepared when health care spending is not stochastic, but just 44% when it is. Among single women who are not high school graduates the percentage adequately prepared declines from 33% to 15%. Authors’ Acknowledgements We are grateful for funding from the U.S. Social Security Administration (SSA) via the Michigan Retirement Research Center (UM10-18). We thank the National Institute on Aging for additional financial support for data development (1P01AG08291). Joanna Carroll provided excellent programming assistance. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the Federal Government.