It might be the biggest one.
Once you retire, your out-of-pocket medical bills could eat up more of your retirement budget than anything outside of housing (and they might even be more).[1]
One of the most difficult things I have to do is to explain to someone how much their retirement medical expenses are likely to be. There’s often an extreme amount of sticker shock.
Conversely, one of the most satisfying things I get to do, is when I work with someone and we accept the challenge and create a plan that sends them into retirement feeling great about their financial future.
So, how do you pay your unexpected medical costs without prematurely draining your savings and investments?
First, there’s Medicare. And while it’s different for everyone, let’s assume that once you reach 65, Medicare will cover about 50 percent of your basic medical costs.
While that sounds pretty good (and it is), just how much are you on the hook for?
Frankly, a lot.
Medicare: Half Good, Half Bad
That’s because, first, Medicare won’t generally cover your deductibles or your copayments.
And, second (and perhaps most importantly), Medicare won’t cover long-term (custodial) care, which none other than the U.S. Government estimates 55 percent of us are going to need.
While the average stay in long-term care is about two-and-a-half years, one in seven adults will need care that lasts longer than five.[2] The average cost of custodial care amounts to about $138,000 out-of-pocket per person.[3]
What else should you know about the shortcomings of Medicare?
Even if you are fortunate enough to avoid needing long-term care, what other common medical procedures doesn’t Medicare cover?
- Most dental (including dentures)
- Eye examinations
- Cosmetic surgery
- Acupuncture
- Hearing aids
- Routine podiatry
And that’s just for starters.
It’s not news that getting older is expensive. That said, after Medicare, in brass tax terms, just how expensive might your retirement healthcare costs be?
Not including long-term care, the average out-of-pocket medical costs for a married couple over a 20-year retirement is $260,000. (This means that if even one partner ends up in an assisted living facility, you could easily be responsible for $400,000 in out-of-pocket medical expenses over the course of your retirement.[4])
I’m sorry to say that the $260,000 number referenced above rose 6 percent ($15,600) in 2016, and is likely to rise just as much in 2017, 2018, 2019, and beyond.
How do you pay it? Can you pay it?
Now that you’ve had a moment to digest those numbers, there’s but one thing left to do: Prepare. But how? What are the ways you can prepare for uncovered healthcare expenses once you retire?
Here are four.
1) Prepare now for long-term care
While we are fully licensed to, we don’t sell life or health insurance at Allworth Financial. This places us in the unique position of being able to make informed insurance recommendations that are entirely in your best interests.
I consider long-term care to be one of, if not the biggest threat to the viability of your retirement plan. That’s because not being financially prepared to pay for long-term care won’t only wreak havoc on your finances, it could well do serious damage to the financial situations of your loved ones, as well.
While there are both government programs and some hybrid insurance polices (which combine long-term care and life insurance) that could be an option for some retirees, the two most common ways to pay for long-term care (LTC) are typically going to come down to either a specific LTC insurance policy (which you purchase), or to you paying for your care directly from your savings once you or your spouse enters a facility or hospital.
Talk to your advisor before you make any decision about purchasing long-term care insurance so that you’ll clearly understand which option is best for your unique situation.
A couple of quick asides: The cost of buying long-term care insurance rises as you age. And, interestingly, the cost of long-term care varies quite a bit from state to state. (This may well enter into your planning and actually influence where you retire. For instance, long-term care is generally twice as much in California [and the Northeast] as it is in either Texas or Missouri.) [6]
If you’ve accumulated enough assets, you may be able to forgo LTC insurance.
Even if you’ve saved many millions of dollars, depending on your situation, I still might urge you to fully protect your assets, and those of your heirs, by buying a LTC insurance policy. It’s expensive. But if you’re married, the odds are pretty high that one, or both of you, are going to need it.
2) Stay in your network
If you have auxiliary health insurance, that’s almost certainly a good thing. I’ve seen people “accidentally” be responsible for 1000s of dollars in extra medical bills merely because they innocently went outside of their medical provider’s network to visit a specialist or lab that they thought was covered, but wasn’t.
This only has to happen once to take a big bite out of your budget. Know what your plan covers, and who is in your network.
3) Adjust your income to lower Medicare Part B surcharges
According to eHealth Medicare, Medicare Part B covers services and supplies that are medically necessary to treat your health condition. This can include outpatient care, preventive services, ambulance services, and durable medical equipment.
You pay premiums for Medicare Part B based on your adjusted gross income (AGI). There are five income tiers for individuals (and five for joint filers), resulting in five monthly premium levels. (These are for 2017.)
To estimate the income tier levels for joint filers, merely double the individual AGI amounts. [7]
- Under $85,000 ($134 a month premium)
- Under $107,000 ($187.50 a month premium)
- Under $160,000 ($267.90 a month premium)
- Under $214,00 ($348.30 a month premium)
- Over $214,000 ($428.60 a month premium)
How can you keep your premiums low? Your financial plan (including the “draw down” of your retirement accounts) is especially important when it comes to Medicare Part B. That’s because some people take more income from their retirement accounts or investments than they actually need, which results in both a higher tax bill and higher Medicare Part B premiums.
However, for those people in higher income brackets, with advance planning, there are ways to find relief. For instance, both Roth IRA income and qualified withdrawals from health savings accounts do not count toward your AGI.
4) Plan and plan (and then plan some more)
Paying your medical expenses once you retire is about a lot more than merely paying your bills. Comprehensive planning can build and protect your nest egg and extend the life of your money.
Don’t let the large dollar amounts associated with things like long-term care insurance discourage you from taking the steps that are necessary to prepare for retirement healthcare costs. While the dollar amounts can appear staggering, there are practically as many ways to make it work as there are words on this page, but only if you plan.
Contact us today with any questions.
[1] US News and World Report August 31, 2016
[2] US Department of Health & Human Services
[3] US Department of Health & Human Services
[4] MF October 11th, 2016
[5] Fidelity Retiree Health Costs Rise October 16th, 2016
[6] What Would Long-Term Care Cost? Fidelity. July 13th, 2016
[7] eHealth Medicare.com July 24th, 2017
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