When most people think of what could financially derail their retirement, things like inflation, market losses, and taxes come to mind. Health care costs are rapidly emerging as a major expense during retirement and the number one risk to a successful retirement. With lifetime employment a relic of the past and longevity on the rise, it should be a top-priority to include health care expenses and planning as part of the financial and retirement planning you do with your financial advisor.
For more than a decade, Fidelity, one of the world’s largest providers of financial services, has calculated an annual estimate of medical expenses for retirees. The estimate applies to retirees with traditional Medicare insurance coverage and does not include any costs associated with nursing-home care. A 65-year-old couple retiring in 2012 was estimated to need $240,000 to cover medical expenses throughout retirement. The estimate has increased an average of 6 percent annually since Fidelity’s initial calculation of $160,000 in 2002, with the exception of 2011 when the estimate declined $20,000. As people age, health care costs typically continue to increase beyond the inflation rate, mainly because declining health requires more hospital visits, medications, and assisted care. Statistically, health care costs skyrocket in the last few months of life. Variables such as long-term care insurance and comprehensive living wills can help keep those costs in check to a degree. But because everyone’s situation varies, it’s important to consider the current health status of you and your spouse, your family history, and any employer-based health benefits that will be available to you in retirement. All this information plays into longevity calculations and what may be required to meet your future medical expenses.
If you’ve been covered by a generous employer group health plan, you may be in for a rude awakening when you retire. Although the government may subsidize some of your health care costs under the Medicare program, you will still be responsible for certain out of pocket costs.
Here are a few tools that can help with your planning:
Fidelity Health Care Expenses Cost Calculator– makes a comprehensive assessment of how much retirees are likely to spend on health care in retirement based on their age, financial resources, and insurance status
AARP Doughnut Hole Calculator-allows users to input information about medications and dosages to figure out how to avoid the dreaded donut hole
My Medicare Matters– gives you help with reviewing plan choices and guiding clients through the maze of Medicare choices
Medicare Interactive– offers answers to specific Medicare questions and in-depth information about virtually every aspect of Medicare. It’s run by the nonprofit Medicare Rights Center
Medicare – provides an official government site full of resources including information about the various parts of Medicare
Here are some things to consider for keeping health care costs under control after you retire:
Avoid Medicare late enrollment penalties, find out when you need to enroll in Medicare and be sure to sign up during your enrollment period.
Shop carefully for private insurance, Medicare does not cover everything. In order to avoid coverage gaps for prescription drugs and the portion of medical services that Medicare doesn’t pay for, you will need to have private insurance.
Reduce the income-related monthly adjustment amount, If your income is over $85,000 (if single) or $170,000 (if married), you will be charged an income-related monthly adjustment amount on top of your regular Part B and Part D premiums. These are cliff thresholds, which means if your income is just $1 over the amount, you will be charged the higher amount. Talk to your financial and tax advisors about ways you may be able to reduce your modified adjusted gross income in order to avoid these excess charges.
Be a cost-conscious consumer of health care, one of the factors underlying the meteoric rise in health care costs over the past two decades is the growing role of health insurance in our country, because it tends to make consumers unaware of costs when they seek health care services. This is especially true for workers with comprehensive employer health insurance. Once you go onto Medicare you will need to be aware of health care costs. Otherwise you could be surprised by some rather large medical bills. Start by asking if your doctor accepts Medicare, some don’t. Ask if the doctor accepts assignment, which means you will be billed no more than the Medicare-approved amount, with you (or your Medigap insurer) being responsible only for the deductible and coinsurance amounts. Examine your insurer’s drug list and be aware of the copayments and coinsurance amounts for drugs you take. Do this annually, because drug plans change from year to year. Take into consideration all of your health care needs, including dental care and other services not covered by Medicare, and be aware of all of your out-of-pocket costs, preferably before they are incurred.
Seek preventive care and stay healthy, although staying healthy won’t help you reduce your premium costs, it will certainly help you avoid copayments and coinsurance amounts. Stay healthy by exercising and eating right. Get your free flu shot every year. Take advantage of Medicare’s free screenings, such as mammograms, prostate cancer screenings, colorectal cancer screenings, and others. Certain conditions, if discovered early, can be treated quickly and easily and at a much lower cost than if hospitalization or expensive drugs are required.
Although the current health care costs of healthy retirees are lower than those of the unhealthy, the healthy actually face higher total health care costs over their remaining lifetime. Researchers cite three reasons why this happens: First, people in good health can expect to live significantly longer, so they are at risk of incurring health care costs over more years. Many of those currently free of any chronic disease will succumb to one or more such diseases at some point before they die. And third, people in healthy households face an even higher lifetime risk of requiring nursing home care than those who are not healthy, reflecting their greater risk of surviving to advanced old age, when the risk of requiring such care is highest. That said, staying healthy is never a bad idea. Here are some wellness tips to consider as you grow older:
Protect your assets with Long Term Care Insurance: Americans routinely buy all sorts of insurance – for cars, homes, health and even pets and boats. But when it comes to long term care insurance, relatively few sign up. The cost of insurance is expensive, but the cost of long term care can be crushing. Each year it is estimated that 11 million US adults need some type of care. You can learn the basics of long term care at this website: http://longtermcare.gov/the-basics/
Eat right, exercise, etc. You know the drill. Exercise is especially beneficial as you grow older. According to the U.S. Surgeon General’s Report on Physical Activity and Health, inactive people are nearly twice as likely to develop heart disease as those who are more active. Lack of physical activity also can lead to more visits to the doctor, more hospitalizations, and more use of medicines for a variety of illnesses.
Reduce stress. Chronic stress can lead to heart disease, sleep problems, digestive problems depression, obesity, and memory impairment. One way to reduce stress in retirement is to have a financial plan in place so you can relax and feel confident that money will not be a problem.
In conclusion, when deciding how much to save for retirement, and how rapidly to draw down their wealth during retirement, households need to consider what risk they are prepared to accept of having their assets substantially depleted by health care costs, and whether they should insure against health care costs by purchasing long-term care insurance.
Health Care Planning in Retirement
