Every financial plan should provide a strategy for how you will cover expenses in retirement. However, one of the more difficult expenses to plan for is the cost of health care. There are many variables that may affect how much you will spend on health care in retirement, including your lifestyle habits, your family longevity, and where you live. Also, since health care continues to be an evolving system in our country and will most likely continue to face changes in legislation in the years to come, there are variables that are out of your control. In this post, we will discuss 5 health care questions that you need answered before you retire.
Plan Ahead
Fidelity’s annual Retiree Health Care Cost Estimate suggests that a 65-year old couple who retired in 2019 would need $285,000[1] to pay for medical expenses throughout their lifetime. They also estimate that health care costs will make up about 15% of a normal retiree’s annual spending[2] and that 52% of people who live past 65 will need some form of long-term care.[3] With this in mind, your financial plan should definitely include an annual estimate of spending for medical insurance premiums and out of pocket expenses including deductibles and co-pays.
Question 1: Do you want to keep your doctor in retirement?
Have you built a good relationship with a medical professional and is this something that you want to keep after retirement? According to a CDC survey, about 88% of people have a regular place that they go for treatment and 25% of retirees choose not to relocate to be close to a trusted medical provider.[4] If this is something that matters to you, then you need to begin asking questions. You can research your insurance options by considering if your employer provides a retirement health care benefit or by researching Medicare Advantage plans that will allow you to keep the same provider network. Also, ask your doctor how they work with Medicare or Medicare Advantage plans. Don’t forget to consider your dental and vision care providers in this research.
Question 2: How long are you planning for?
Your financial plan should consider your longevity. If you have reached 65, there is a 50% chance that you will live to 94 if you are a surviving spouse of either gender[5].
Question 3: Have you considered inflation?
A major concern about our health care system is that the costs have increased much faster than annual incomes. Currently, the inflation rate for health care spending is projected to be 5.5% annually through 2027[6]. Your financial plan should factor in this higher growth rate compared to your other retirement costs.
Question 4: Who will be there for you?
Most of us have had some type of personal experience with a family member that needed long-term care or assisted living. However, even short-term care should be considered. I remember a time when my grandfather fell and broke his leg. This was not a long-term care condition, however when considering that my grandmother was the only one there to help him transfer himself until he regained his strength, the recovery required medical professionals to continue to provide services after he was released from the hospital. I still remember that this necessity brought additional costs that they had to pay for.
It is important to have conversations about who will provide support and care for you if you can’t take care of yourself. If you are single, widowed, or divorced, this is an especially important conversation.
Question 5: How will you pay for it?
When you answer the first four questions, you are defining how much you assume health care will cost you. Your financial plan really comes down to showing where you will get the money to pay for it. Will your monthly income suffice to cover your costs, or will you need to plan on portfolio withdrawals to supplement? Here are some action items to consider now that may help your plan:
Invest in your health. While some health situations are unavoidable and unpreventable, there are plenty of studies that show that your daily habits can help prevent or reduce major health conditions. Research all that you can on healthy living and make any necessary changes today. Eat well. Get exercise. Take care of your stress/anxiety. Get sleep. Cut out bad habits.
Consider a health savings account. If you have access to a health savings account, this can be a great way to accumulate money to pay for future health care costs. It provides tax-advantages now and in the future.
Consider tax-free money. A viable strategy may be to pay your premiums out of your regular income sources (i.e. Social Security, pension, etc.) and then pay for larger out of pocket expenses with your Roth accounts or life insurance cash values.
When planning for a period of your life that may last 30 to 40 years, there will no doubt be changes along the way. However, it is important to have the conversations and create some baseline rules that will help you make decisions as they present themselves in the future.
[1] Fidelity Benefits Consulting estimate, 2019. Estimate based on a hypothetical couple retiring in 2019, 65 years old, with life expectancies that align with Society of Actuaries’ RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP-2016. Actual expenses may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care. [2] Fidelity Benefits Consulting estimate, 2019. [3] U.S. Department of Health & Human Services, 2018 [4] CDC National Center for Health Statistics, http://www.cdc.gov/nchs/fastats/access-to-health-care.htm. [5] Society of Actuaries RP-2014 Mortality Table projected with Mortality Improvement Scale MP-2014. [6] Centers for Medicare and Medicaid Studies, National Health Expenditures Projections, 2018–2027