Health-care costs must be an integral part of a retirement financial plan because if they aren’t part of the equation, they can easily drain your nest egg. But here’s the problem: They are impossible to predict accurately.
“Health care is a big concern for everyone,” says William Moran, senior vice president-Wealth Management and senior financial advisor at Merrill Lynch Wealth Management. “It comes back to looking at the plan and what retirement looks like.”
Next to life expectancy, health care is the second largest cost for retirees. “People don’t realize how long they’re going to live and how much assets they’ll need,” says chartered financial analyst Robert Stammers, director of Investor Education for the CFA Institute. “[Health-care costs] should be part of your overall investment portfolio. Think how you’re going to cover these and create ‘what if’ scenarios.”
Knowing how much care you are going to need as you age is impossible, and the combination of getting sick and spending more than expected on care could derail retirement. However, understanding your health insurance and other coverage options along with executing a detailed savings plan can help make sure you’ve saved enough money to have the retirement you want.
“People assume everything will be covered but it’s not,” says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial. “Dental care, eye care, routine hearing tests, custodial care, long-term care — none of that is covered [by Medicare] so you need to purchase medical supplemental insurance or have funding provided in your plan.”
Starting the planning process early is key. “If you start sooner rather than later, you can have a desired retirement rather than an affordable retirement,” says Moran. “The sooner you start to plan, the easier it is to make what you want a reality.”
Experts suggest questions to ask to help guide you through your healthcare planning.
What illnesses run in the family?
To help figure out your future health-care needs and subsequent costs, experts suggest looking at your family health history and your own medical history.
If there’s a history of long-lasting illness, getting long-term care insurance could help reduce costs significantly in the future.
Do you know what Medicare covers?
In a recent Ameriprise Financial survey, 56% of respondents hadn’t researched Medicare coverage and 69% hadn’t purchased long-term care insurance.
Understanding the cost of your health-care coverage and whether your financial plan and current assets can cover potential medical costs is key. “If you don’t want to use your assets, you should research your choices about Medicare options, like Medicare supplemental insurance or long-term care insurance,” recommends de Baca.
There are different options under Medicare. Part A covers hospital stays and is generally free, with Part B covering doctor visits and costs $104.90 each month. Part C or Medicare Advantage offers coverage beyond the standard insurance, and Part D covers prescription drugs. Private insurers also provide coverage for some of Medicare’s out-of-pocket costs.
“Understand Medicare and what the different programs cover,” advises Moran.
Have you saved enough?
“Most individuals are underestimating the amount of money needed to cover expenses not covered by Medicare,” says de Baca. “Medical subsidies exist that cover hospital stays and hearing aids— that’s where people haven’t added up the cost of care.”
Medical costs beyond insurance can be high. According to the Employee Benefit Research Institute, the average couple spends about $271,000 over their lifetime on medical expenses beyond what Medicare covers. This number is projected to be $454,000 in 2020. “Essentially, the rate of inflation for health care is increasing at a higher rate than inflation,” says de Baca.
There are tax-deferred ways to save money, which can help mitigate bruises to the budget, including Health Savings Accounts (HSAs). “Pre-retirement, people can start funding these through their employer or on their own,” says certified public accountant Nadine Lee, managing director of The Colony Group Metro NY Offices and president of The Colony Family Office. “It’s like a 401(k), as long as you use it for medical expenses, it’s not taxable when you withdraw money.”
HSA limits for 2013 and 2014 are $3,250 and $3,300 for individual coverage and $6,450 and $6,550 for family coverage, with a $1,000 catch-up contribution allowed for people over the age of 55.
Stammers recommends choosing an account with an HSA-compatible health insurance plan.
What are your options for funding long-term care?
Having the right insurance could potentially help keep your nest egg intact. Depending on your health, the possibility of going into a retirement home or assisted living facility could become a reality, says Moran. “Do you have the sources to pay for this and if not, what are the insurance options? If you can’t self fund, look at the other alternatives.”
According to Genworth’s 2013 Cost of Care Survey, 70% of people over the age of 65 will need long-term care. “There are government-funded assisted facilities, but these may not be what you want,” says de Baca.
Paying for the facility you want can be expensive — the median rate of a private room in a nursing home is $230 per night, according to Genworth’s survey. “If you’re in a nursing home for four years, that ends up being $400,000 to $500,000, which is more than people have earmarked for health care,” says de Baca.
If you’ve major medical costs over time, Stammers suggests thinking about different ways to pay for these. “Would you divest or buy insurance to cover these,” he asks. Depending on how much assets you have and whether you want to pass these on as an inheritance, long-term care insurance may or may not make sense. Even though long-term care insurance can afford you a nicer facility, it may make more sense to pay for it yourself — you have to look at the numbers to make sure that’s the right decision for you.
Long-term care insurance isn’t the only option. Certain life insurance plans have long-term care riders with a death benefit if you don’t use that money, says de Baca.
Lee suggests looking into your state’s different programs. “Some states have programs if you purchase three years of long-term insurance, you’ll automatically go onto Medicaid,” she adds. However, since the rules to qualify for Medicaid are very stringent, this may not be an option for everyone.
“People can save and be smart to make sure they have medical care,” says Lee. “Identify doctors and providers that are covered under your health insurance.”