For many Americans, rising healthcare costs are a major source of worry as they plan for retirement. According to a recent survey, two-thirds of affluent Americans have not calculated what their healthcare costs may be in retirement. Many retirees and pre-retirees are simply not prepared for the high cost of medical care in retirement - costs which are increasing every year. Many Americans believe that they can rely on Medicare; however, the reality is that Medicare only covers a percentage of health-related expenses and most retirees pay large out-of-pocket healthcare expenses.
To illustrate the scope of the issue, here are a few figures:
According to an AARP study, Medicare beneficiaries aged 65-74 spend $2,920 a year in out-of-pocket expenses, while those aged 75-84 spend $3,815 a year. Retirees 85 and above spend $4,615 a year. According to the Center for Retirement Research, retirees can expect to spend 29% of their annual income on healthcare by 2020.
We believe it is critical to include healthcare planning in your long-term financial planning process. Major medical expenses can easily wipe out retirement savings; however, there are many strategies that may be able to prevent this from happening. With our assistance, you can make plans to ensure that your medical needs are taken care of without adversely impacting your retirement lifestyle or becoming a financial burden on your family.
While there are many ways to address health care costs, and any solution you choose should be personalized to meet your needs, here are a few options you may wish to consider:
Purchase long-term care insurance. Long-term care insurance is designed to cover costs related to long-term care like extended hospital stays and skilled nursing. The major benefit of a well-thought-out LTC policy is that it can transfer the financial burden of care to the insurance company without wiping out your retirement savings.
Notably, the cons of LTC insurance must be carefully weighed. Annual premiums can be expensive, ranging from $1,000 to $3,000 or more per person if you start in your fifties, depending on the policy's features. Worse, letting the policy lapse at any point wastes money previously spent on premiums.
Extensive fine print on LTC policies can exclude benefits that you thought were due. For example, many policies contain exclusions for certain health conditions and may not cover all types of long-term care services and facilities. Some purchasers of LTC insurance never need long-term care, meaning that they end up paying years of premiums for little or no benefit. LTC insurance can offer protection and greater peace of mind, but it is critical to consult with a financial professional to choose the policy that best fits your current situation and expected future needs.
Set up a dedicated investment account only for long-term care expenses. Investors with the means to do so can “self-insure” by setting aside a portion of their investment savings for medical expenses. The major benefit to this option is that investors won’t be reliant on an insurance policy to cover expenses and will be able to use any remaining balance for other purposes. The obvious downside to this strategy is that all normal investment risks apply and it is entirely possible that your investment savings will not be enough to cover all healthcare expenses.
Use your home equity. Those who own their own home can hold it in reserve for long-term care, tapping it through home equity loans, reverse mortgages, or by simply selling the house. Obviously, the viability of this option is entirely dependent on how much equity you have in your home and how high your healthcare expenses are.
Self-insuring through investments or home equity alone is a strategy that is best for those with substantial assets, since falling short could mean having to rely on family or Medicaid. Those who worry that their assets may fall short, or who intend to pass on a significant estate to their family should consider long-term care insurance to ensure high medical expenses don’t deplete their assets. Most of our clients choose some combination of the above three options that fits their specific needs and financial situation.
Forecasting what your actual healthcare needs and medical costs will be is difficult. If you haven’t begun to plan for your future needs, it is time to start now. By beginning the process early, you can take advantage of lower long-term care insurance premiums, and can plan your retirement more effectively. Early planning is especially important for those with existing illnesses or a family history of health problems. We believe that it is vital to have the advice of a financial professional who can look at your whole picture and help you choose the long-term care strategy that’s right for your needs. Whatever your circumstances, you can take steps to protect yourself and your loved ones from the threat of devastating healthcare expenses.
If you have any questions about how rising healthcare costs could affect your financial wellbeing, please let us know. It would be our pleasure to help you address your current and future financial needs.