Planning for Healthcare Expenses in Retirement

Over the past decade, the cost of healthcare has increased dramatically. As you plan for retirement—even if that’s 20 years away—it’s important to earmark more of your resources for out-of-pocket healthcare costs.

It has never been easy to calculate how much a person should put away prior to retirement to achieve a reasonable degree of comfort that his or her assets will last through their lifetime. In recent years, the challenge has grown as people live longer. The cost of healthcare continues to rise dramatically each year, and it becomes increasingly difficult to predict how much of the cost individuals will have to cover themselves.

The key is having a plan for healthcare expenses as part of your comprehensive integrated financial strategy.

There is general consensus that a couple retiring today at age 65 should count on having to cover around $240,000 in healthcare costs during their remaining years.

This represents cost-sharing expenses associated with Medicare; premiums for Medicare Part D prescription drug coverage; and out-of-pocket costs for expenses not covered by Medicare or other medical insurance. It does not include the cost of long-term care—time spent in a nursing home or assisted living facility or at-home care for an extended period of time.

As you work with your financial advisor to set retirement savings goals, here are some of the key issues to consider:

  • There is a strong probability you will need long-term care at some point in your life. Currently, the cost of care in a nursing home or assisted living facility averages around $6,000 a month. Again, your financial advisor can project what the cost is likely to be when you reach your 60s, 70s or 80s, for example, and recommend ways to factor that into your retirement planning.
  • While four years is the average stay that many advisors currently plan around, it’s important to consider your personal situation, including your current health, family history, incidents of Alzheimer’s in your family, and other factors that could indicate the need for longer-term planning.

  • At-home care can be just as expensive, or even more – and the need for it can come sooner than expected. Take, for example, the case of a 43-year-old father of three who was paralyzed from the neck down in a skiing accident.  His round-the-clock in-home care currently costs more than $75,000 a year and is likely to climb each year.
  • Long-term care insurance may—or may not—be part of the recommended solution. Again, this is where your financial advisor can help you determine whether insurance or self-funding is most appropriate for you.
  • Other forms of insurance can also be advantageous in your planning. In the case of the man disabled in his 40s, he not only has the expense of round-the-clock care but he has also lost many years of earnings. It’s important to include disability insurance in your financial planning, either through your employer or as personal coverage. And, of course, life insurance can be an economical way to replace assets lost to an estate because of extended healthcare costs.
  • It’s important to make your family aware of your plans. Even the most carefully implemented approach to healthcare planning may not achieve your goals if your family is not aware of the components. Be sure your family knows where your documents are stored and has contact information for your financial advisor.
  • Periodic reviews and updates are also essential. The key is having a plan for healthcare expenses as part of your comprehensive integrated financial strategy and making sure it remains adequate for your long-term needs and goals.

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The most effective approach to financial planning is one that integrates all components—investments, insurance, savings for education, savings for retirement, credit needs, charitable giving, tax planning and estate planning—into a unified, coordinated strategy customized to your needs, priorities and preferences.

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