Planning for Medical Costs in Retirement

in Retirement Planning by

If you’re thinking about retirement, you should also be thinking about the cost of healthcare during retirement. Most experts estimate that the lifetime average out-of-pocket expenses for a retired couple are approximately $275,000—and that price tag is rising. What’s more, if you plan to retire earlier than 65, before you are eligible for Medicare, the bill could be higher.

Are you suffering from sticker shock? It’s a tough pill to swallow (pun intended), but it’s much better to know the truth up front so you can plan for your future. There are really three main considerations—and the first has some good news attached, so we’ll start there.

A Lifetime Estimate

You do not necessarily need to set aside $275,000 for your healthcare costs before you retire. In fact, most healthy retirees spend much less during the early years of retirement and more as they age. This means a lot of out-of-pocket expenses can be paid in monthly installments over long periods, which can be accommodated within your monthly budget. So keep in mind you may not necessarily need to have this money set aside prior to retirement; however, you should ensure medical expenses are factored in to your retirement budget

Over the full course of retirement, that $275,000 number is an average-cost estimate. If you maintain good health throughout your retirement, you may not spend as much. On the other hand, you might spend much more if health issues become a major obstacle. Before you retire, you should weigh the possibilities. Is your health currently good? What is your family medical history? Do you practice healthy eating and excercise habits? Based on your information, you can create your personal estimate—but be realistic.

Retiring Early Increases Healthcare Costs

If you plan to retire before 65, your lifetime healthcare costs will, on average, run higher than the $275,000 estimate. In fact, these costs may run substantially higher. You will not qualify for Medicare until age 65, so you’ll be responsible for all your healthcare expenses until you hit the qualifying age.

Many people do not fully realize how much of their medical costs are subsidized by their employers. If you are planning to retire early, you need to find out just how much you will pay if you’re not covered by your employer. Unless your employer will continue to pay your healthcare, an increasingly rare scenario, you’ll be responsible for the full amount. If you are near 65, you may be able to use COBRA to cover the gap in coverage or you may need another solution. For example, you can opt for a higher deductible policy to bring down monthly costs, but you are accepting that additional risk if you need to use your healthcare coverage.

When you consider this additional expense, you might be convinced to work longer, which is a very reasonable solution. Working longer can extend your subsidized medical care coverage from your employer and you gain more time to save for retirement. A financial advisor can help you determine how many additional years you might want to work. In many cases, just a couple more years can make a big difference.

Long-Term Care is the Wildcard

That $275,000 estimate does not include any long-term care expenses—and health insurance, even Medicare, does not cover these costs. In short, a lengthy stay in an assisted living facility or nursing home can quickly drain your retirement savings.

One solution is long-term care insurance, but you need to start thinking about this option in your 50s or 60s—it won’t be available if you wait until you need the services. Generally, the younger you are when you obtain a policy, the less you will pay for the monthly premium. However, there are some other things to consider besides the premium.

First, you’ll want to stick with a reputable insurer. You will, most likely, be paying a premium for years, even decades, before you need the service. You want those premiums to go to a stable company. Keep in mind, that most long-term care policies allow for the insurer to raise your premiums, often significantly during the life of the policy. You also need to look carefully at how the policy works. For example, most policies do not kick in until the patient has needed assistance for 90 days, and the qualifying guidelines are quite specific. Policies also have a daily cap, which needs to closely match the long-term care costs for your area or you’ll still be stuck with a big bill.

Lastly, standalone long-term care insurance is “use it or lose it,” meaning if you never have long-term care needs, you could end up paying for expensive insurance for no reason. Some carriers offer hybrid life insurance/long-term care insurance policies that are a little more flexible. You should work with your financial advisor to determine which type of policy is appropriate for you.

Because long-term care insurance is so expensive, many retirees choose to self-insure this risk. While Medicare does not cover the cost of long-term care, Medicaid does. However, to qualify for Medicaid you will need to significantly spend down your assets which can leave your loved ones in a difficult position. If you chose to self-insure this risk, it is important to understand all of the implications to you, your partner and your heirs.

Our Take

As you can see, healthcare costs are a prime factor in retirement planning and you may need help with your decisions. Personal Capital does not offer healthcare products, such as long-term care insurance, but our skilled advisors can provide you with an assessment of your personal options and help you come to some reasoned conclusions.

Contact a Financial Advisor

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Bryan Knoebel, CFP®

Bryan Knoebel, CFP®

Bryan is a Certified Financial Planner® and Chartered Life Underwriter with a diverse background in personal finance. He has worked with individuals and families with a wide range of investment management and financial planning needs. Prior to joining Personal Capital, Bryan served as a subject matter expert for a financial technology startup dedicated to helping users improve their financial health. He received his Bachelor’s degree in Business Management from the University of Colorado. In his free time, Bryan plays guitar and enjoys various outdoor activities with his family.
Bryan Knoebel, CFP®

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  1. Susan

    Very important topic…can’t emphasize enough..get this insurance sooner rather than try for later…We are in the 10th year of our 2nd Long Term is $5000/year, but the coverage is excellent…it has gone up twice in the ten years, but we aren’t complaining..didn’t work to spend all our assets on nursing home/assisted living, plus it does pay for in-home care, if needed. Happy to pay the premium and use our life long savings for other things.

    • Moe

      Susan, good for you. Alternatively, investing that $5000/yr premium over the next 25-30 years should build a personal healthcare fund approaching half a million dollars or more – money that remains in your pocket, NOT the pocket of the insurance company! Is there risk? Of course. Just remember to consider the ‘risk’ of rising insurance premiums, benefit cuts and/or caps, etc. Take a look at the average length of time long term care patients need that type of care. Perhaps you will even have the good fortune of NEVER needing long term care! Susan has chosen to insure, but it is not for everybody.

  2. Leandro Mueller

    This is a great eye opening post, Bryan! A lot of people tend to forget to include health care in their retirement plans. When that happens, their retirement is often doomed by shock and frustrations. It is easy to forget about health care planning because you are still under the health coverage given by your employer. But people should remember that will change in retirement. Part of healthcare planning should include knowing various options that retirees can take advantage to help them face debilitating health expenses. Medicare, Medigap insurance plans, LTC insurance, Medicaid, etc., are options that can aid them in paying the said expenses. If those options are fully understood by retirees, it is possible to maximize the benefits they have and protect their finances and even assets from depleting.


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