What does it take to be financially prepared for potential healthcare costs in retirement? As the old saying goes, “Needing insurance is like needing a parachute. If it isn’t there the first time, chances are you won’t need it again.” Healthcare costs can add up for even the healthiest of retirees, so what can we do to prepare for these costs, and how would you handle them in the event that you need long-term care?
First, consider some statistics
- A 65-year-old today would need to save between $72,000 and $93,000 to retire if they wish to have a 50% chance of covering healthcare costs in retirement. Note that sum would ideally be set aside in an earmarked “emergency medical fund.”
- For a 90% chance of covering costs, $127,000 to $143,000 would be necessary.
- What about the steady increase in drug expenses? Now our expected expense has increased to $165,000 for a 50% chance, and $265,000 for a 90% chance of the savings lasting for a couple with median drug expenses.
- This leads us to an estimated $260,000 (in today’s dollars) to conservatively insure against healthcare costs depleting other assets.
Before determining the exact amount we need for our healthcare nest egg based on our specific circumstances, remember long-term care costs are not covered by health insurance. Assisted living and nursing home care must be paid out-of-pocket, by long-term care insurance, or in California by Medi-Cal (generally speaking, assets must be depleted before one is eligible for Medicaid/Medi-Cal).
Covering deductibles, premiums, out-of-pocket and long-term care expenses could cost approximately $350,000 in today’s dollars to achieve a 90% chance of covering those expenses. Long-term care in a nursing home alone will cost $6,844 per month, based on the national median cost.
Every situation is different.
Some of the first questions you should be asking yourself are, “How healthy am I, and what is my family medical history?” The answers will help you make more informed retirement and healthcare decisions. For example, if you require expensive drugs, your savings could be depleted quickly. Taking a hard look at one’s life expectancy could prompt the decision to retire earlier. There are numerous other questions that could impact healthcare decisions in retirement.
Consider consulting a Financial Planner to examine several hypothetical cash flow situations. This can help guide you toward answering the question of how much you should set aside and how to invest funds allocated toward healthcare to meet your needs.
What to do?
Focus on what you do know, rather than speculating on everything that could be.
- Take charge by running a customized estimate based on consistent, stable expenses such as premiums, deductibles, and co-pays. This number will not change much. Bump the number up to factor in a potential long-term care scenario.
- If you are planning to retire earlier than 65 and do not often use your current health insurance, look into Health Savings Accounts (HSA). You can pre-fund investment dollars in a tax-exempt vehicle that can pay future deductibles, allowing you to elect a low cost, high deductible plan in the years leading up to activating Medicare.
- Talk to family members, your primary care physician, and a financial consultant to set up a contingency plan to execute in the event of an abrupt medical issue.
- Make sure your will, power of attorney, and advance healthcare directive are up to date. You may want to keep a copy of the directive with your primary care physician.
- Years before using it, look into Medicare supplements and determine what makes the most sense for you.
- Educate yourself as a patient by asking good questions to your trusted medical professionals. What tests and drugs are really needed? Does a CAT scan need to be done immediately at the hospital or could you do it tomorrow at an outside facility that is less expensive?
- Are you taking good care of yourself in mind and body? Maintaining a healthy lifestyle will go a long way towards mitigating future healthcare costs.
Our financial planners at Insight Wealth Strategies will meet with you to discuss your specific situation to determine the best course of action. Just like properly packing a parachute before jumping out a plane, retiring with a plan for healthcare will put your mind at ease.
David Chazin is a registered representative of Lincoln Financial Advisors.
Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln Marketing and Insurance Agency, LLC and Lincoln Associates Insurance Agency, Inc. and other fine companies. Insight Wealth Strategies is not an affiliate of Lincoln Financial Advisors Corp. Lincoln Financial Advisors does not provide legal or tax advice. 3000 Executive Parkway, Ste 400. San Ramon, CA 94583. (925) 659-0217. CA Insurance License # 0D45501 CRN1785874-050117
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