How Boomers Can Plan for their Health-Care Costs in Retirement

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Published July 05, 2013

| FOXBusiness

Health-care costs are often the big question mark hanging over boomers’ retirement savings. It’s impossible to predict just how much health-care will cost as we age, but there are steps we can take to reduce our risks and protect our savings.

Fidelity Investments annual look at expenses for retirees shows a couple, both 65, retiring in 2013 would probably need $220,000 to cover health-care expenses if the husband lives to 82 and the wife 85, the average life expectancies.

"These numbers matter because health-care related costs will eat up a good portion of one's savings in retirement, but it seems to be the cost that individuals have the least amount of awareness of," said Brad Kimler, executive vice president of Fidelity Benefits Consulting, in a statement.

While Medicare provides some coverage for retirees, it doesn’t cover everything. The financial impact of a long-term illness can drain retirement savings quickly. Even boomers in good health will have the added expenses of premiums, co pays, deductibles and prescription costs as they age. It is important for baby boomers to consider the impact of rising health care expenses on our savings and income.

Mark VandeVelde, certified financial planner at Wealth Partner at Hefty Wealth Partners in Auburn, Ind., offered the following tips for boomers to plan for health-care costs in retirement:

Boomer: What steps can retirees take to avoid underestimating health-care costs in retirement?

VandeVelde: Educate yourself! Talk to other people that are in later life stages and learn about their experiences and health-care costs. It’s also a good idea to ask them what they expected and whether or not they felt prepared.

People that have experienced the things that you are likely to experience down the road hold a treasure chest of information. You just have to ask the right questions to open the chest. Do research online to learn about current industry trends and how they are going to affect you.

Work with your financial advisor and lean on their experience and expertise to build a plan around the "what-ifs". If you have a formal financial plan, make sure that it encompasses all of the costs that you anticipate for health care as a separate item, not just lumped in with all other spending. This helps to keep the focus on this major issue

Boomer: What are some of the misconceptions baby boomers have concerning Medicare coverage. What does it cover and what is not covered?

VandeVelde: The most common misconceptions are that Medicare will cover all of your medical needs once you reach age 65 and that it will also cover a long-term stay in a nursing home. Neither of these are true. Medicare is just like your traditional health insurance coverage in that you still pay premiums, deductibles, and co-payments. It will cover the majority of the costs of major health events, but it will not cover it all. However, there are no-out-of pocket costs for most preventative services. When it comes to long-term care, Medicare will cover most medical needs, with deductibles and co-pays, but not any form of custodial care, whether in your home or a facility.

Another major, and dangerous, misconception is that you have no choices in the matter of health care once you reach age 65. Just like any other time in your life, you are a consumer of health care and you have choices! You can accept the Traditional Medicare coverage if it is best for you, but it is not your only option.

Boomer: Please explain the two types of Medicare: Traditional and Medicare Advantage

VandeVelde: Traditional Medicare is comprised of Part A and Part B for everyone, and then other options are available, such as Part D and Medigap policies, that can increase specific coverage, such as prescription drugs. Parts A and B are government programs, while Part D and Medigap policies are purchased through private companies.

Medicare Advantage policies contain the same benefits as Traditional Medicare, but are offered by private insurance companies that are approved by Medicare. Medicare Advantage policies tend to offer more coverage options than does Traditional Medicare. You have greater flexibility in choosing a plan that will fit your needs.

Once a year, you can elect whether or not you are accepting Traditional Medicare or you are choosing your own Medicare Advantage plan. Every year, in theory, you could switch between Traditional Medicare and Medicare Advantage based on what is best for you at the time, but you can’t have both at the same time.

Boomer: What effects if any do you see the Affordable Care Act having on health-care planning for pre retirees and retirees?

VandeVelde: None at this time. Health care planning should continue to be based on today’s environment. One of the scariest aspects of the Affordable Care Act is that there are still many unknowns about the complete impact on our health care system, our baby boomers, and our economy as a whole. I recommend that pre-retirees and retirees continue to plan based on what we know, not on speculation of what is to come. Even if there are certain aspects of the reform that we think we understand now, they are all subject to change.

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