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Planning for Rising Health Care Costs in Retirement

August 21, 2013

Rising health care costs are the primary reason why many baby boomers deplete their retirement savings and do not reach their retirement lifestyle goals.  Baby boomers tend to underestimate health care costs by more than 60%1, largely from a reluctance to ascertain the significant impact health care costs can have on their retirement savings.

The rapid pace of health care increases and projected life estimates . . .

From 2000 to 2010, older consumers’ out-of-pocket health care costs increased 49%, according to the Administration on Aging; and this rapid pace is only projected to continue.  Health care spending, the second largest expense in retirement, is projected to grow at an annual rate of 6.3% through 20192.

The Employee Benefits Research Institute recently found that a married couple who retired at 65 in 2010 would need nearly $376,000 to cover expenses not paid by Medicare, given the present value of Medicare benefits.3  These costs include Medicare premiums, prescriptions, out-of-pocket expenses such as office co-pays and “Medigap” premiums, or premiums for insurance plans that cover services not paid by Medicare. Yet the foregoing $376,000 estimate does not even include the costs associated with a prolonged illness or a protracted nursing stay, which can be $127,000 per year in the Boston metro area.5

The factors and variables making it difficult to plan adequately for health care costs in retirement include:

Employers have significantly curbed offering health care packages as a part of their pension plans and have limited other benefits.  Most retirees are now forced to cover all costs not covered by Medicare.

People are living longer and the often overlooked services not covered by Medicare (i.e. dental, hearing, and vision).  It’s common for retirees to live well into their nineties—a direct correlation to the inevitable need of long and very expensive nursing home stays.  In fact, the Congressional Budget Office provided the following estimates, concerning individuals who turned 65 in 2010 and the probability of nursing home stays in the future6:

  • 33% of those individuals will need at least 3 months of nursing home care
  • 24% of those individuals will need more than 1 year of nursing home care
  • 9% of those individuals will need more than 5 years of nursing home care

And with the benefit of longer life expectancies come the costs perpetuated by medical breakthroughs—expensive, highly effective drugs and other life pro-longing treatments.  Advancements in Cancer treatments, for example, have dramatically increased life expectancies and survival rates, but with out-of-pocket premiums that can be in the high five figure range.

Medicare eligibility and the penalties for not getting in on time.  Knowing when retirees need to sign up for coverage—and the penalties they can incur for signing up late—can present costly consequences.7  The rules concerning signing up for Medicare are strict.  For example, people who reach 65 but who fail to sign up for Medicare Part B—which covers doctor’s fees—may face a 10% premium increase for each 12-month period during which they could have participated in the program but elected not to do so.8

Proper and Insightful Health Care Planning …

At Elm Tree Capital, we are knowledgeable of the mechanics and complexities surrounding health care issues and can help you create a health care savings plan before retirement, as well as an income strategy during retirement.  When working with us, we will help you:

  1. Estimate your health care costs in retirement;
  2. Understand what Medicare covers and where the added costs come from;
  3. Select the most suitable Medigap coverage;
  4. Consider post retirement savings plans;
  5. Plan appropriately for long-term care; and
  6. Create an income strategy to cover these essential costs.

Our comprehensive process will consider the costs associated with insurance premiums, medical services, prescriptions / medical supplies, and long-term care.  We will then integrate these health care projections with the other components and variables of your financial life to help develop a comprehensive retirement income solution.  This solution should realistically estimate your essential and discretionary expenses and seek to ensure that you achieve your retirement goals and do not outlive your assets.

Though the health care challenges may seem daunting, with our proper and insightful planning, we will present a number of steps you can take to help prepare for a better tomorrow.

To learn more about health care costs or any other aspect of Financial Planning, call Eric Zine at 781.930.3003 or e-mail us to schedule a free consultation.

1. Spring 2006 Fidelity Retirement Index; Fidelity Employer Services Company, Health and Welfare Consulting, 2006

2. “National Health Spending Projections: The Estimated Impact of Reform Through 2019,” Health Affairs, October 2010, Volume 29, Issue 10.

3. “American Funds Investor,” Fall | Winter 2012 Issue, 7 (citing “The Use of Health Savings Accounts for Health Care in Retirement,” Paul Fronstin, Employee Benefit Research Institute, April, 2010.)

4. Ibid.

5. Ibid.

6. Financing Long-Term Care for the Elderly, Congressional Budget Office, April 2004.

7. Darla Mercado , “Soaring Health Care Costs Squeeze Retirees,” Investment News, 12, 17 (September 17-21, 2012)

8. Ibid.

Elm Tree Capital provides financial planning and investment advisory services with a strong commitment to customer service.  If you have questions about Health Care Planning or other personal financial matters, do not hesitate to contact us by e-mail by clicking here or by calling us at 781.930.3003.