Why Healthcare Costs Must Be Part of Your Retirement Planning
Even the wealthy worry about running out of money when it comes to healthcare in retirement. A recent report reveals that 73 percent of older wealthy Americans list health care costs as one of their top retirement concerns, and they are right to be concerned. Illness is one of those great unknowns of life, and healthcare and long-term nursing care are expensive, getting more so every year. Healthcare costs must be an integral part of our retirement planning. Otherwise, we’re putting all our retirement plans at risk.
There are four long-term issues working against us:
Healthcare is Expensive
Many people think Medicare will cover all their healthcare expenses, but that’s simply not true. Medicare offers excellent healthcare coverage, but it does not cover dental, vision, or prescriptions among other things. For these, you must pay out of your own pocket for Medicare supplemental insurance — Medicare Parts A, B, C and D.
Then there is the looming unknown of long-term care. Unfortunately, someone turning age 65 has about a 70 percent chance of needing some form of long-term care over their lifetime. This can easily cost hundreds of dollars a day for months if not years, an expense few of us are able to absorb.
Inflation is Making Healthcare Ever More Expensive
Healthcare costs are rising by an estimated 5.5 percent per year, almost double the rate of inflation. By some calculations, the average 55-year-old couple, 10 years away from retirement, could eventually be dedicating up to 92 percent of their Social Security benefits to covering their post-retirement out-of-pocket healthcare expenses.
This is the issue I run into most often in planning with my clients. Since most people are likely to incur these types of expenses, increasing at twice the standard cost of living, it’s critical to plan for.
We are Living and Remaining Healthier Longer
Longevity is an obstacle for healthcare as it is for retirement in general. A couple aged 65 has a 43 percent chance of at least one of them living to the age of 95. Longevity is a problem, because the longer you live, the more you start spending down your assets. And, while many expenses shrink as you get older, healthcare expenses are likely to multiply.
The longer we live, the more health issues we develop. Medical science has advanced to the point where things that might once have killed us in our 60s and 70s can be cured in a near-miraculous manner, which allows us to live healthier, more active lives well into our 80s and 90s. Unfortunately, if someone lives into their 90s, there is a higher probability that they will need assisted living or suffer chronic conditions that require close medical supervision.
Market Volatility Can Play Havoc
With healthcare costs inflating by 5.5 percent every year, and the bank only offering 1.5 percent interest, many retirees turn to the stock market in order to maintain purchasing power, which exposes them to significant market risk. Market volatility is almost inevitable, especially in the current economic climate, and the steep ups and downs of the market can be gut-wrenching for those who are living off their investable assets. Even the fixed-income marketplace is risky right now, because any rise in interest rates sends the price of bonds downward.
Market volatility is especially worrisome for retirees because of something called “sequence of returns.” When you are in the accumulation phase of your life, it doesn’t matter much to you whether the stock market goes up or down in any particular year. But, if there are a few down years at the beginning of your retirement, those years will stress your portfolio because you will be withdrawing money while the stock market is down, eating into the principle you planned to live on. That is why annuities are so popular, because it shifts the risk of stock market volatility to the insurance companies.
My Suggestion: Talk to a Specialist
I highly encourage anyone approaching retirement to talk to specialists. For example, have someone who knows what they’re doing guide you through the process of selecting the right Medicare supplement plans. These specialists collect a commission on the insurance they sell, but this doesn’t increase the cost of insurance to you.
You also need a strategy for managing the cost of long-term care. There are many different strategies to take in planning for long-term care — such as tapping into an accelerated death benefit from a permanent life insurance policy — and working with the proper professional can help you identify the approaches that are most appropriate for you.
People also need to test their plans, again and again. Run projections to “stress test” your plan to see what events could potentially derail your strategy, then look for products and strategies to minimize or eliminate that risk. Then, do it again next year, every year, to see if anything has changed. Retirement planning isn’t just about getting to retirement. It’s also about getting through retirement. Healthy and happy, with the money you need to help keep you that way.