Start Planning Now to Outlive Your Savings Later

Remember the adage “Those who fail to plan, plan to fail”? One area in which you do NOT want to fail is planning for healthcare costs as you grow older.

As you plan your future finances, you’ll want to ensure that you don’t outlive your retirement savings. Over time, expected healthcare expenses can slowly drain those savings; moreover, a significant health event can quickly wipe out your assets. Add to that the risk of needing long-term care in a nursing facility at a cost of hundreds of thousands of dollars, and you can see how you could quickly deplete your retirement assets.

I’m retiring before I turn 65

If you’re considering retirement prior to turning age 65, it’s important to plan to self-fund medical insurance premiums during the years until Medicare coverage begins. There are a variety of options available to help you bridge the gap, all of which may increase in cost over time, and should be factored into your retirement income plan. Options include employer-provided coverage (if available), COBRA, and individual health insurance, including plans available through the Healthcare Insurance Marketplace.

Don’t expect the government to take care of you.

The common belief that upon turning age 65 Medicare will cover the vast majority of your healthcare expenses is simply not the case.

What doesn’t Medicare cover?

Although Medicare covers most major costs, with the exception of vision and dental care, the associated out-of-pocket expenses, including monthly premiums for certain program components, deductibles and copayments can quickly mount. You can purchase a Medigap supplemental insurance policy to alleviate many of the out-of-pocket deductibles and copayments, but even with supplemental insurance, the most glaring gap remains—Medicare does not cover most of the potentially significant costs associated with long-term care.

How much can I expect to pay out-of-pocket?

Average costs are primarily driven by two variables—your age and overall health. Over the past thirty years, medical cost inflation has been rapidly outpacing the overall rate of inflation. This higher inflation means that if you’re an average 65-year-old with moderate health who today is paying about $5,100 a year, you can expect to pay close to $10,000 a year at age 75, and nearly $24,000 a year by the time you reach age 89.

Anticipating future costs is unpredictable, but a good rule of thumb is to factor in a 9% annual healthcare cost increase for the years prior to age 65, and a 7% annual cost increase from age 65 onward.

Long-Term Care

The facts speak for themselves: Approximately 70% of Americans who are currently age 65 or older will need some type of long-term care. The average stay in a nursing home is about 2.2 years for men and 3.7 years for women. The average annual cost for a nursing home stay at $83,950 and the average cost for full-time care (12 hours/day) by a home health aide at $91,000 a year,

What constitutes long-term care?

Long-term care consists of those services needed to assist you with the activities of daily living, such as walking, getting out of a chair or bed, eating, toileting or bathing—either in an institutional setting or at home. Long-term care is frequently related to a specific accident, health issue or overall decline in health in old age, including dementia. With you can see how long-term care costs can quickly wipe out a lifetime of savings.

Options for funding long-term care costs

There are several options to pay for long-term care expenses, including using your own personal assets (self-insuring) or depending on family members to provide assistance. The risk of self-insuring is that, depending on how much care you’ll need, you may quickly deplete your assets.
If you’re not comfortable taking this risk, you may want to consider purchasing an insurance policy with long-term care benefits. Depending on the policy options you select, insurance can help you pay for the care you need, whether you are living at home, in an assisted living facility or in a nursing home. There are three main types of insurance policies with long-term care benefits you’ll want to consider: Traditional long-term care insurance, a hybrid life insurance policy with a long-term care benefits rider, and permanent life insurance with a long-term care benefits rider.

The Take-Away

Health care costs are high and getting higher, but proper planning will help improve the likelihood that your assets and your retirement lifestyle last a lifetime.

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