At Grand Wealth Management, when we work with clients who are planning for retirement, we prepare and discuss a detailed lifetime cash flow projection. By evaluating anticipated retirement income sources – and expenses – we help our clients make sound decisions today that contribute to a secure future. As part of our assistance, we call attention to an important expense item that tends to be overlooked or underestimated by people planning for retirement: the cost of health care during retirement.
Planning for health care costs is critical, especially because increases in these costs continue to greatly exceed the overall inflation rate in the U.S. In 2005, the last year for which data is available, total national health care expenditures rose 6.9% – twice the inflation rate. And U.S. health care spending is expected to increase at similar levels for the next decade. Retiree health care costs may climb even faster.
What can you do?
Stay informed. Now that we’ve gotten your attention about today’s health care cost levels, resolve to stay on top of data about future increases in these costs. One good source of health care cost information is the website of the National Coalition on Health Care at www.nchc.org.
Check your benefits program. Find out if your employer provides retiree health coverage, and if so, how much this coverage will cost you. If your employer does not provide retiree medical, evaluate individual coverage options and costs.
Save for retirement with health care costs in mind. According to Fidelity Investments’ latest health care cost estimate, a 65-year-old couple retiring this year will need approximately $215,000 to cover total medical costs in all their years of retirement. This estimate, a significant amount for most retirees’ budgets, factors in projected health care inflation. Make sure your retirement planning adjusts all your projected retirement expenses for inflation, with health care costs adjusted at a higher assumed rate than the general inflation rate.
Consider a Health Savings Account. If one health coverage option offered by your employer is a high-deductible health plan (HDHP) coupled with a Health Savings Account (HSA), find out if you qualify for this arrangement, and if you do, give it your serious consideration. An HDHP has lower premiums than other health plans, although it also comes with a higher deductible. Once enrolled in an HDHP, you can put the money you’re saving on premiums into an HSA. Then, you can use the funds in your HSA to pay for qualified current health care expenses not covered by the HDHP, including certain expenses incurred out of pocket before you’ve met your deductible.
Later, during retirement, you can withdraw unused funds to cover both medical and non-medical expenses. But here’s what’s really good about an HSA: tax advantages. Your contributions to the account are tax-deductible (although there are federal limits on these contributions). Also, investment earnings on your HSA funds are tax-deferred, and in fact, withdrawals from your account can be completely tax-free, provided the money is used to reimburse you for qualified health care expenses.
Get to know Medicare – and its limits. Once you turn 65 as a retiree, Medicare becomes your primary health coverage. Although Medicare pays for many retiree health care needs, there are clear limits. Generally, you’ll still be responsible for, among other costs, deductibles and copayments, any charges greater than a Medicare-approved amount, and services excluded under Medicare. Even if your employer provides retiree health coverage to supplement Medicare, you will still have significant gaps in coverage. Medigap plans, available for purchase from private insurance companies, can fill in some of these gaps.
Look into long-term care insurance. “Long-term care” refers to services to help a chronically ill or disabled person carry out essential everyday activities like eating, bathing and dressing. Current estimates are that 69 percent of people turning 65 will someday require long-term care either at home or in a nursing home or assisted living facility.1 Yet typically, long-term care is not covered under either Medicare, employer-provided retiree health plans or Medigap plans. Many private insurers do offer long-term care insurance. Given an increasing need for such care, and with the average cost of a nursing home stay at nearly $67,000 a year and rising2, should you buy a long-term care policy? Premiums can be high, but your decision on whether or not to buy should be based not only on the cost of coverage but your health and family health history, financial resources, net worth, future affordability, and other factors.
At Grand Wealth Management, we help our clients better understand the outlook for retiree health care costs. We also help clients take steps, including those we’ve outlined above, to manage the risk posed by these costs.