Unforeseen events are bound to happen at any point in our lives. However, it’s best to be prepared for them, especially when they occur at that very fragile point in our lives when we are living off of our retirement savings.
In the U.S., life expectancy has reached its highest in history. On average, a man turning 65 today can expect to live until 84.3, while a woman can expect to live until 86.6, according to the Social Security Administration. This is great news of course, but as we get older and live longer our chances of having health complications rise. The relatively weakMedicare program and high health care costs in the U.S., relative to other Westernized countries has created a crisis for aging Americans.
If you’re not prepared, not only are you at risk of burning through your hard earned capital, but also, that of your family who will hopefully come to the rescue. The best way to arm yourself from running into this issue is by understanding and projecting your costs, investing to protect against healthcare inflation, and considering supplemental health insurance where Medicare lacks.
Underestimating the Costs of Healthcare.
Towards the last 5-7 years of life, retirees that enter assisted living facilities can burn through a good $200,000 to $300,000 quite easily. Fidelity’s annual Retirement Health Care Cost Estimate recently reported that couples over the age of 65 are spending a total of $245,000 on healthcare through retirement, up from $220,0000 last year.
Often what happens then is that the adult children then need to come in to save the day by contributing their savings. This puts these adult children at risk for not having enough down the line.
Medicare beneficiaries bear a percentage of healthcare costs due to program deductibles and other out-of-pocket expenses. A study by the Employee Benefit Research Institute (EBRI) reported that in 2012, Medicare covered only 60% of health care costs for Medicare beneficiaries age 65 and older. Private insurance covered 15% of the total costs, while out-of-pocket expenses covered 13%.
The EBRI estimates that in 2015, the average American couple over 65 with $326,000 in savings for premiums and out-of-pocket drug expenses would have a 90% chance of being able to cover the costs. This savings target increased between 6% and 21% from 2014 to 2015.
Plan in Advance.
First thing’s first, you need to evaluate anticipated medical costs you may face in retirement. This analysis should be done with your financial advisor and spouse if applicable, and any immediate family members. This analysis should take place every few years or so, and will be more helpful as you get closer to retirement age. At least ten years before retirement is an optimal time for a thorough evaluation.
In the analysis, you should consider your anticipated coverage, look at the details of your employee-sponsored insurance plan (if you’re lucky enough to have one) and understand what Medicare covers. To project future healthcare costs, you’ll need to look at your current lifestyle, health status, and family medical history. Compare with the national average and evaluate using specific immediate family health considerations such as a history of diabetes and cardiovascular issues. The Social Security Administration offers a life expectancy calculator and other tools to help in the process.
Ultimately, the goal is to detect any gaps between your employer-sponsored plan and Medicare, evaluate your current medical situation and use that to project your future anticipated coverage and costs.
Invest To Mitigate Inflation Risk
Although it may seem counterintuitive to those seeking to keep their hard earned money away from risky investments, the only way to protect your money’s value is investing it for growth. Older individuals typically lean towards the more conservative side when investing, afraid that they won’t have time to recover from a crisis similar to theRecession in the late 2000s.
PwC’s Health Research Institute (HRI) anticipates a healthcare cost inflation rate of 6.5% in 2016, with a projection of 4.5% after benefit design changes (which aren’t guaranteed.) Despite improved conditions, including innovative healthcare sector disruptors and a more informed average healthcare consumer, medical inflation continues to outpace the overall economic inflation rate.
Traditional investments with yields less than this 6.5% or 4.5% will fail to secure retirees with their purchasing power. For retirees investing specifically for healthcare expenses, they should consider allocation stock funds, rather than money market funds and Treasuries with yields less than 4%.
Try Supplemental Insurance
Upon concluding your initial healthcare evaluation, you may find that there’s a portion of your expenses that won’t be covered by Medicare. Original Medicare Parts A, B, and D will leave patients paying a large portion of prescriptions, around 20% of doctor visits and procedures and, at least, $1,200 for hospital visits. This is where you may considerMedigap supplemental insurance, which covers costs such as deductibles and copayments.
Consider a Health Savings Account
If you are eligible for a Health Savings Account (HSA), this type of asset could protect you from High Deductible Medical Health Plans. Contribute pre-tax to the fund, which is then used for eligible medical expenses. The money can be used right away, or will continue to grow inside the account until withdrawn for future medical expenses in retirement.
The Bottom Line
When we think about retirement, sometimes we have to consider the not-so-fun aspects of getting older, such as incurring some pretty hefty medical costs. However, there are ways to be proactive and protect against high healthcare bills ruining your precious retirement days. The best thing you can do for yourself and your family is to understand your situation and plan in advance, invest against inflation, consider supplemental insurance and a health savings account. And most importantly, alongside all of these preventative measures, we can’t forget that living our lives in a healthy manner will do wonders more than any financial plan around.
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