Is Your Nest Egg Safe Against Future Health-Care Costs?

For baby boomers nearing retirement, planning for health-care costs is one of the most important factors to consider in determining how much you will need to save in order to enjoy a comfortable and financially secure future. No one knows the future health problems they may have, or the medical expenses they may incur throughout retirement, but without proper planning health-care costs can potentially wipe out your nest egg in a hurry and leave you with critical financial challenges.

AARP’s 2014 health-care costs survey found that almost four in ten 50-plus workers (38%) are not saving for health-care costs, and (44%) do not have any plans to do so in the future. Only a quarter (28%) plan to begin saving within the next few years.

Jean Setzfand, AARP’s vice president of Financial Security, discussed with me what you need to know about planning for potential health-care costs in retirement.

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

Setzfand: Out-of-pocket health care costs are an increasingly large, and often an unplanned expense in retirement. One of the most important things pre-retirees can do to avoid underestimating their future health care costs is to recognize that on average, the lifetime out-of-pocket health care cost for an average retired couple starting at age 65 can exceed more than $200,000 (in today’s dollars). Many folks overlook the out-of-pocket co-pays and co-insurance expenses for prescription drugs that you pay in addition to your monthly Medicare premium.

Your individual costs, however, will depend on your particular health situation, the medications you take, and what type of Medicare plan you buy. A proactive step you can take is to estimate your individual out-of-pocket health care costs.

Boomer: How can pre-retirees protect their retirement accounts from potential future health-care costs?

Setzfand: The best protection for your retirement account against potential health-care costs is to budget for them. The most common barrier to saving is the sense that one cannot afford to do so at this time, either because they are paying other expenses or taking care of others.

Whether you budget for health-care cost expenses or not, health care is a necessary expense item – a ‘must spend.’ As such, folks pay their health-care bills at the expense of other items on which they would ‘prefer’ to spend. Working with a financial advisor to help you save for enough for health care in retirement is always a smart idea.

Boomer:  What advice would you offer to those that feel Medicare will cover the cost of health-care in retirement? What additional out-of-pocket costs can be expected after Medicare has made payment of claims?

Setzfand: Many people are surprised to learn that Medicare is not free (you pay a monthly premium based on your income) and it doesn’t cover 100% of your health-care needs. There are additional out-of-pocket costs for prescription drugs, co-insurance and deductibles. You also have to understand that Medicare doesn’t cover routine dental or vision care, or hearing aids, or long-term care. Take time today to learn more about the Medicare program at AARP’s Medicare Question and Answer tool.

Boomer: If you have a family history of chronic medical conditions, what preventive measures can be taken to avoid the costs of treating such ailments?

Setzfand: If you have a family history of chronic health conditions, such as diabetes, high blood pressure, or heart disease, it’s especially important to see your physician regularly for wellness exams and preventive screenings which may help prevent the problem from developing. Eating a healthy diet, getting regular exercise, quitting smoking, and moderating your alcohol consumption are also important in helping to prevent health problems.