Thanks for joining me for Financial Fitness Friday – my weekly blog where I share a few words of financial wisdom to help put YOU back in the driver’s seat of YOUR financial future.
When thinking about and preparing for retirement, the typical American is thinking about line dancing, cruises, golf, and happy hour.
While that is what the “dream retirement” is all about – those fun, recreational adventures, it is also important to make sure you have enough money to cover the necessities.
And medical care is one of the most essential of them all.
Unfortunately, far too many people dangerously underestimate how much their medical care will cost.
If you are one of them, you could find yourself in a position where you have drained your nest egg much faster than you expected, because you incur out-of-pocket medical expenses you did not plan for.
Healthcare is Probably Going to Cost Way More Than You Think
Many future retirees have a very optimistic – and perhaps naive – picture of what their healthcare spending is likely to be… at least, according to a recent study conducted by Fidelity (I have linked the study at the end of the blog).
“It showed that 37% of non-retired adult financial decision-makers estimated healthcare spending for a senior couple in retirement would total $50,000 to $100,000.”
Although this may seem like a lot of money, it is actually far less than an average senior couple should actually expect to pay. In reality, what is Fidelity’s estimate for out-of-pocket medical expenses?
$295,000!
Let us repeat that: for the average 65-year-old couple who retired last year, their average health care cost over their retirement time horizon will be nearly $300,000.
That does not even include long-term care, such as if you go into a nursing home or assisted living facility.
And healthcare costs only go up year over year, so future retirees are likely to spend even more.
Health care is one of those areas where the costs actually tend to rise faster than the average rate of inflation.
It is understandable why many people underestimate the costs of health care.
Many future retirees simply assume that Medicare will take care of most of their costs and cover more than it does.
Or they do not anticipate getting sick as early in retirement as many people actually do.
I probably do not need to tell you how incredibly damaging this can be to your portfolio and retirement plan.
If you have to spend a quarter-million dollars more than you planned on for your medical expenses, it is inevitable you will deplete your nest egg much faster than anticipated.
Failing to be realistic about health care expenses during retirement could leave you and your spouse without the funds you need later in life if your account runs dry.
It can also mean that the extra money you had hoped to leave your family as a legacy – will instead go to one of the local hospitals, nursing homes, or to the federal government.
Start Preparing for Health Care Spending ASAP
If you are not yet retired, it is crucial to develop a realistic plan for how you are going to afford your care during your golden years. I will offer a few solutions below:
- Increase your retirement savings goal (and retirement contributions) to compensate for the out-of-pocket expenditures you will likely incur in your later years.
This means taking full advantage of the tax-advantaged tools that have at our disposal:
a. Make sure you are taking advantage of your full 401k match (if you have one)
b. If eligible, maximize your contributions to a Roth IRA.
If you have access to a Roth 401k, you may want to increase your contribution amount or reposition your traditional 401k contributions (in excess of the employer match), as taxes are likely to be higher in the future.
- Speaking of tax advantages, if you are eligible for a health savings account (HSA), utilizing one can be one of the best ways to accumulate the money you need for retiree health care.
That is because an HSA is the only account that provides three tax breaks instead of two.
Most tax-advantaged retirement accounts provide tax-free growth AND the ability to either:
i. Contribute with pre-tax dollars (401k, IRA, 457, 403b) OR
ii. Make tax-free withdrawals (Roth IRA, Roth 401k, Cash Value Life Insurance).
But HSAs allow you to harvest all 3 tax advantages:
i. Invest with pre-tax funds
ii. Avoid taxes on gains as your money grows
iii.Take money out without owing taxes (qualified medical expenses)
HSAs are also a good option because if you end up healthier than average, and you do not need that money for medical expenditures, you can take money out and use it for whatever you want, penalty-free. (Provided you are older than age 65).
Since you will not be using the funds for qualified medical expenses, you lose the 3rd tax advantage, but that means you will simply be taxed at your ordinary income tax rate – the same as you would be with distributions from your 401(k) or IRA.
- Consider a Medicare Supplement. Many people overestimate the amount that Medicare covers, and are shocked when they learn about the gaps, and just how costly they can be.
If you are going to purchase a Medicare Supplement (or Medigap), the best thing to do is purchase one as soon as you are eligible for Medicare at age 65, as there is no medical underwriting done when you are first eligible (This is referred to as the Guaranteed Issue Period).
That means if you have pre-existing health issues, you cannot be declined, and those issues that make you higher risk cannot be held against you in the form of higher cost for the policy.
- Consider Long Term Care Insurance
The $295,000 average health care cost quoted in the Fidelity study does not include long-term health care costs.
And according to the US Department of Health and Human, 72% of seniors aged 65 and older will need some form of long-term care.
While not all seniors wind up in a nursing home or assisted living facility, of course, if one does – the average cost of a nursing home in the United States is over $90,000 per year, according to a recent article by thebalance.com.
And the median cost for a full-time home health care aid is $4,576 per month, according to Genworth (“The Balance” article linked below.)
There are 3 major types of Long-Term Care protection strategies available to consumers:
- Traditional Long-Term Care Insurance (w/ options for in-home care or facility only care)
- Annuities with Long Term Care Riders: In some instances, annuities that are paying an income stream can increase the income to help pay for long-term care. For example, one annuity that I am familiar with, the income stream will double and stay at that increased level for up to 5 years in the event of a qualified long-term care incident.
- Life Insurance Policies: although these are different than traditional long-term care, the chronic illness rider of these policies allows the death benefit to actually be spent while the person is still alive, for qualified long-term care.
And then if the person does not actually need the benefit for long-term care, they can access the cash value of the policy for a tax-free income or leave the death benefit tax-free to their families.
Make sure to check with your financial professional and fully understand the policy provisions so you know what is covered, and what qualifies as a qualified long-term care incident.
The best time to start looking at a long-term care plan is in your early 50s.
Dave Ramsey
Outdated advice by financial “gurus” like Dave Ramsey recommends looking at policies once you turn 60, but it is often too late by then because many people already have health issues that prevent them from purchasing coverage.
Remember, this is different than what I mentioned above with the “Guaranteed Issue Period” of Medicare Supplements – there is no such provision for Long Term Care Insurance.
You cannot just buy a long-term care insurance plan. You must also qualify with good health.
Bottom Line:
Unfortunately, not everyone can invest in an HSA. Not everyone is eligible for a Roth IRA or has access to a Roth 401k.
Not everyone will qualify for long-term care or life insurance.
Even if you are not eligible, you still need to figure out a way to accumulate enough money to cover the realistic cost of healthcare as you age.
As mentioned above, increasing contributions to your other retirement plans could work, or you could even open a special IRA that you specifically earmarked for medical expenditures.
That way, you will have the peace of mind of knowing there is a dedicated account for your care.
Whichever approach you take, the important thing is to recalibrate your expectations of what healthcare costs will look like, so we can bring them in line with reality.
The sooner we do that, the more sure we can be that healthcare expenditures do not derail your financial security in retirement.
If you do not have an adviser to help you out with these important decisions, I would love to be that person for you. Just send me a message on social or email me at Ronald.sneller@snellerfinancial.com
Thanks for taking the time to read today’s blog, I hope you found it informative and valuable.
Enjoy your weekend!
Sincerely,
Ron
Disclaimer: While I am a personal Financial Consultant and Investment Adviser, what I discuss on these blogs is not to be taken as or construed as personal financial advice, or investment advice.
Rather, it is about providing you with information & resources to empower you, the reader, with the knowledge that you need to make informed decisions that feel right to YOU.
And if you would like my assistance in guiding you down that path, that is where I can learn about your specific situation and work with you to give you personalized advice & guidance.
If you would like to contact me regarding my services, you can email me at Ronald.sneller@snellerfinancial.com
Articles:
Title: Americans Are Dangerously Underestimating Health Care Costs in Retirement, a Study Indicates
Website Link: https://www.fool.com/investing/2021/04/12/americans-are-dangerously-underestimating-healthca/
Title: Fidelity 2021 State of Retirement Planning Study
Website Link: https://s2.q4cdn.com/997146844/files/doc_news/2021/03/24/State-of-Retirement-Planning_Fact-Sheet_FINAL.pdf
Title: Average Cost of a Nursing Home
Website Link: https://www.thebalance.com/average-cost-of-a-nursing-home-4177589
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