The Wild Card in Retirement Planning: Health Care

May 27, 2021 Willow Creek Wealth Management Posted in Articles

A common financial planning hot-button issue is worry over the cost of health care on a fixed income in retirement. While we of course cannot predict how much care a retiree will need or their actual life expectancy, health care risks can be mitigated by understanding how Medicare works, maintaining good health, and with informed financial planning.

Top Concerns

Not only is it difficult for retirees to predict healthcare needs, research by the Center for a Secure Retirement shows there are gaps in retirees’ basic understanding of Medicare coverage and the associated costs, which often result in financial surprises. It's not surprising that 80 percent of Americans surveyed were concerned about uncovered healthcare expenses and 74 percent about becoming ill (with Alzheimer’s topping the list).

Retirement Healthcare 101

 

Understand what Medicare does and does not cover

Medicare can be confusing with the deadlines, various parts, and deductibles. But understanding what Medicare does and does not cover is imperative to successfully planning for healthcare costs in retirement. Medicare plans run the gamut from Medicare Part A through Part D, creating a complex maze of choices to consider. It’s important to know, however, that deductibles and coinsurance, and benefits like dental,  vision exams, hearing aids, and long-term care are not covered by Medicare.

Take advantage of preventive care

The best way to take care of your health care costs is to take care of your health. But less than half those actually eligible take advantage of Medicare’s annual wellness program. Understanding your coverage will help you maximize your health care investment.

Explore long-term care

“One-third of people will need some type of long-term care,” according to Scott Leavitt, president of the National Association of Health Underwriters. Unfortunately, eight in ten Boomers under age 65 do not know if Medicare covers long-term care or overestimate its long-term care coverage. Consumers who do explore long-term care options are usually in their early 60s but you should discuss the optimum time to lock in affordable rates with your adviser or an insurance specialist.

Plan for loss of independence

An old Zen aphorism says that two veils separate us from the divine – health and security. It is easy to understand how important this concept is with 80% of the population over 65 living with some sort of chronic illness. Some 35 percent over age 85 will suffer from some form of dementia. A financial planner can be an important adviser when facing the tough questions:

  • How would you pay for long-term care?
  • Who would handle your financial affairs?
  • What would be the most important things to you if you were dependent?
  • It is too late for thoughtful planning when a healthcare crisis hits.

Healthcare Costs

Current out-of-pocket costs

According to a study by the Employee Benefit Research Institute (EBRI), a healthy couple turning 65 this year would need at least $325,000 to be reasonably certain they’ll be able to meet their out-of-pocket health care costs during retirement. Healthcare costs are currently rising about 6 percent per year.

Average costs of assisted living and nursing homes

The national average for a private room is $290 a day ($8,700/mo). Assisted living averages $4,000 per month. Adult day services cost $70 per day. And home health aides average $21 per hour.

Early Retirement (before Medicare Age)

The average retirement age is 63 according to the Center for Retirement Research at Boston College. So unless you’re a high-stakes gambler, you need to make sure you have health insurance until you can enroll in Medicare at 65.

Options such as COBRA, high deductible health plans, and high risk pools can cover the gap until you are eligible for Medicare, but they come with costs that must be evaluated carefully.

None of us knows what life has in store. We do know that the majority of us will have health issues later in life and increased expenses as a result. The one factor we do have control over is being prepared. Make sure you have addressed a later-life plan with your financial adviser and loved ones for everyone’s peace of mind and security. Otherwise the old Hebrew proverb “Man plans, god laughs” will be more than apropos.