You saved carefully and invested wisely. You believe your plans are in place, and your nest egg is in order. You feel financially prepared for the years to come. But have you considered your medical expenses?
All too often, retirement planning is focused on wealth management—a good thing in and of itself. But medical costs in retirement can soar, leaving individuals and couples unprepared and maybe even vulnerable.
Some estimates put medical costs in retirement anywhere between $122,000 and $600,000 per person in out-of-pocket expenses. That’s quite a range and maybe not even a useful measure.
Heywood Sloane, a principal with the Diversified Services Group, which works with financial service firms to help their clients prepare for both medical and financial needs, says general estimates are not useful. “You need to take into account your own health and health care plans,” he says. “If you don’t know what you are saving for, you can’t plan effectively.”
It’s never too early or too late to start planning, he says. The ideal time is early in your career. If you start later, you need to figure out how to use the funds you’ve set aside to cover medical costs that may arise and—if you deplete those funds—how you are going to deal with your medical and other living expenses.
If you or your spouse planned on working in retirement, a serious medical diagnosis could wreak havoc with your plans, not only depriving you of expected income but adding expenses you had not anticipated.
For example, if one of you develops Alzheimer’s or another form of dementia, you may need long-term care support. Do you have long-term care insurance? If so, for how long? Will it cover in-home care or only skilled nursing in a recognized facility?
In a brochure to its clients, T. Rowe Price advises that a long-term care policy isn’t for everyone. Some people can’t afford the expense, and some—at the higher end of the wealth spectrum—may be able to self-insure. For those in the middle who may be considering the option, premiums are on the rise. But the insurance is still worth considering when taking possible costs into account. It’s all about risk management.
For example, the U.S. Department of Health and Human Services estimates that, based on 2016 data, a home health aide costs about $20.50 per hour and a semi-private room in a nursing home costs $225 a day or $6,844 a month. Figures vary by state and a host of other factors, but it’s easy to see how expenses can pile up.
“To navigate this complex and financially difficult journey, caregivers and their loved ones need to plan ahead for difficult circumstances,” says Cynthia L. Hutchins, Director of Financial Gerontology with Bank of America/ Merrill Lynch.
She says it’s important to have honest conversations about health expenses, preferred care and the state of finances ahead of caregiving needs. And she says to consider discussing key questions such as:
Who do you want to handle different aspects of your care?
What are your medical preferences and desires?
Where are important medical, legal, and financial documents?
How will you pay for health care expenses and caregiving needs?
“As uncomfortable as these topics may be, having a plan in place leaves caregivers and their loved ones much better prepared for the costs and challenges, while helping ensure the care recipient’s wishes are met at every stage,” Hutchins adds.
Medicare covers many medical expenses for people over 65, but it doesn’t cover everything including custodial care which involves activities of daily living such bathing, dressing and eating. And Medicare doesn’t cover dental care, hearing aids, general eye exams, foot care and a range of specialty services such as in-home intravenous antibiotics.
Even for services covered by Medicare, there are usually co-pays and deductibles. And if you have secondary or supplemental insurance, you have expenses associated with those plans too.
One more thing to remember: Your medical expenses in retirement may be as much as three times higher than they are when you are working, according to the Kaiser Family Foundation.
So now that you are scratching your head, trying to decide what to do, here are some things to think about:
Health Savings Account, or HSA, provides a tax advantage by setting aside funds for medical expenses for those in high-deductible health plans.
Medical Savings Account, similar to an HAS, is specifically for those who are self-employed or have small businesses.
Medicare Medical Savings Account combines a high-deductible insurance plan with a medical savings account that you can use to pay for your health care costs.
In addition to these options, you may want to look into annuities which provide a reliable cash flow during retirement years and can be helpful for those concerned about outliving their assets.
Another possibility is an irrevocable trust which can safeguard assets from taxation. But these can be complicated, and decisions about establishing them may be influenced by individual state laws. So it is best to consult an attorney if you are interested.
Some people make gifts to children or grandchildren to keep money in the family for future use. It’s important to remember that these gifts cannot exceed $15,000 per year per person, and there is a five-year look-back if the transfer is being used to shield assets from Medicaid eligibility.
One more thing to consider: Medical deductions on federal income taxes can be helpful for those who qualify. But, starting January 1, 2019, the hurdle is high: allowable expenses must exceed 10 percent of adjusted gross income.
If all this seems confusing, Sloane, the financial planning expert, says to ask your financial advisor: “What can you do to help me fund my health care expenses over the course of my lifetime?”
If the answer you get is that it’s just part of your portfolio management, then your advisor is not doing an adequate job for you, he adds. You might ask that person if they can work with you or recommend a financial manager to assist.
If you still don’t get the support you need, it might be time to find a new advisor who can help you plan for your medical and financial needs throughout your retirement years.