Guest view: Planning for the unexpected, health care edition
Pared back to its basic components, retirement planning is much less complicated than you might have been led to believe.
When advisers meet with a client who wants to retire, they must first establish a fundamental understanding of three variables: expenses in retirement, preferred incomes in retirement and anticipated age at retirement.
The greatest challenge is managing the incredible number of variables that cannot be assigned definitive values. With few exceptions, the greatest variable today in retirement is health care spending.
How bad is it?
According to Fidelity, a 65-year-old couple retiring in 2017 can expect to spend around $275,000 in out-of-pocket costs to cover their health care needs in retirement. That is a 6 percent increase over last year.
The 6 percent towers over this year’s expected inflation rate of 1.4 percent. The cost of health care has increased more than four times as fast as the cost of everything else.
Any retirement plan of value will account for an assumed inflation rate, but if the cost of everything else is increasing much more slowly than the cost of health care, a well-considered plan must allow for two inflationary rates, one for health care and one for everything else.
And just like that, retirement planning got complicated.
Isn’t Medicare supposed to help?
Well, yes. But…
An analysis by Kiplinger’s, assuming a retiree lives 25 years in retirement, shows that out-of-pocket costs for the premium for Medicare’s Standard Part B, a Part D prescription plan, and a Medigap supplemental policy will cost nearly $200,000.
And it doesn’t include the cost of hearing aids, vision care and out-of-pocket drug costs.
The moral is that even though the government-sponsored health care plan for the elderly is helpful in mitigating costs, access to the plan will require some savings.
Ease the pain
I’m not the kind of jerk to just throw problems without the hope of a reasonable solution, so let’s round up a few tips that might mitigate the agony of spending every last cent saved for retirement on keeping yourself healthy. If you’ve got a few years left until retirement, just a few hours a year and a little bit of cost-cutting today could make a world of difference.
Long-term care insurance
For Medicare purposes, long-term care does not qualify as a “medical expense” and is typically not covered by Medicare.
An insurance policy crafted to cover long-term care can come in many different forms. Some policies allow for a single lump-sum premium that provides an immediate three-fold benefit: instant liquidity for a portion of the lump sum contributed, a death benefit and a long-term care benefit.
Other, traditional long-term care insurance policies require much lower (yet still substantial) ongoing monthly quarterly, or annual premiums in order to buy a benefit that may or may not eventually pay out. Remember, some people die without having needed any long-term care.
Still other policies exist that serve primarily as life insurance, but that allow for a “chronic illness rider” whose description may read almost exactly the same as a long-term care insurance policy. These types of policies will often allow the holder access to a portion of his or her death benefit early in order to cover the costs of long-term care.
Regardless of the option chosen, the earlier in life you pick up one of these policies, the less expensive the annual premiums may be. In your 50s you will likely pay less for a policy than one purchased 10 years later. Because of this, long-term care insurance policies may be worth considering earlier in life.
Health savings accounts
In the end, every life hack you may learn to ease you into retirement is going to wilt in the shadow of the ultimate plan, saving more. As it pertains to health care, the government has given many of us the opportunity to save on our taxes today, benefit from tax-deferred growth over time and eventual tax-free distributions if they are made for qualified medical expenses.
If you and your family have an HSA-compatible health insurance plan, you may choose to save the maximum allowable for family coverage this year ($6,750) and, at the same time, pay for all medical expenses with cash. The goal is to establish a growing pool of funds earmarked solely for health care expenses in retirement.
Don’t worry about saving too much in your HSA because you almost never are. At age 65 the rules governing health savings account begin to allow for greater flexibility in what qualifies as a “medical expense” for tax-free distribution purposes. This means that no matter how much money is in your HSA, there is limited likelihood that you will regret having saved too much.
Registered Representative Securities offered through Cambridge Investment Research Inc., a broker/dealer, member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors LLC are not affiliated.