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The Unexpected Expense That Could Ruin Your Retirement

Category: Financial and taxes in retirement

November 25, 2013 — Over the past week we saw numerous reports reminding us of yet another way that our hard-earned retirements can run onto financial shoals. This time the culprit is one that most of us don’t think that much about – medical expenses. We will explain more about the problem here, along with some ideas on how to prepare your retirement against bankrupting medical expenses.

Fidelity, the mutual fund company, estimates that a couple in average health will spend over $220,000 during their retirement for medical related expenses (and that is down 8% from the previous year). The Employee Benefit Research Institute (EBRI) estimates slightly higher numbers: their age 65 average couple has to have $255,000 available for a 90% chance of covering their medical expenses in retirement. When you add in the possibility of long term care expenses, the picture gets even worse. A recent New York Times article, “You Plan Your Retirement, Then You Get the Health Bill“, estimated that medical expenses, including long term care, could exceed $1 million for the average retiree.

Finding Enough Money to Cover Those Expenses
This is where it gets tricky, as you might expect. The Medicare Rights Center estimates that half of participants in Medicare have less than $77,500 in savings, not nearly enough to cover even the lowest estimate above. A recent AARP survey asked people between the ages of 50-64 how much they thought they would need for medical expenses in retirement. The results – 42% thought they would need $100,000 or less, 16% estimated their total at less than $50,000.

How can these costs be so high, you might say, when Medicare takes care of most such expenses starting at 65? Here’s how those expenses add up:
– For the average couple, both aged 65, the man has a remaining life expectancy of 82, and the woman 85. So they have many years to rack up these expenses. If they live even longer than average, or their health is worse than average, their medical costs will go up from there.
– Even though you are covered by Medicare, you still pay some deductibles, coinsurance, premiums on Part B (doctors visits) and Part D (prescription drug coverage).
– Medicare will not cover vision exams, eyeglasses, dental expenses, over the counter drugs, and the cost of hearing aids.
– The “Times” article reported that the average retiree has a 70% chance of needing long term care at some point. Medicare won’t pay for assisted living. It might pay for a few days of nursing care, but if you have to stay in a nursing home, the average expense is $77,000 year (but the averages vary widely across the country). The average stay in a nursing home is 3 years – some stay less and others longer. Home care costs less, but is still quite expensive.

What Can You Do to Prepare
Beyond the obvious one of saving more money for retirement, here are some ideas to consider for reducing or managing your retirement health care tab:
– Stay healthy! The best single defense you have against big healthcare bills is not to get sick or injured. Eat healthy, stop smoking, drink moderately, get your medical checkups, sleep well, keep your weight down, exercise regularly, and reduce stress. Of course even the person with the healthiest lifestyle can draw a bad health card, but that’s something the person with the worst lifestyle is almost guaranteed.

– Consider a Medicare Advantage Plan, which feature restricted doctors networks and lower out-of-pocket costs.
– Consider working longer, particularly if you get health insurance as a benefit.

– If you are eligible, start a Health Savings Account (HSA) before you retire. There are tax savings and you can keep the money for expenses even after age 65 (when you have to stop contributing to your HSA). Earnings are tax free and you can pass the balance on to your spouse.
– Get Medigap insurance when you start Medicare. You will pay premiums, but get more protection in case you have serious illnesses.
– Consider long term care insurance. This is a complex subject and the products are expensive. But you should at least consider and investigate to see if one of these products might make sense for you. See our article: “Should You Buy Long Term Care Insurance?

Want to estimate your health care expenses
AARP has an online calculator that helps you estimate what your health care expenses will be in retirement. You plug in your basic information like age, height, weight, and medical conditions – it estimates your future costs.

Comments? What has been your experience with health care expenses in retirement? Do you think these expense predictions are on target? What steps have you taken to prepare? Please share your thoughts with your fellow members in the Comments section below.

For further reading:
Health Care Costs Fall (from Fidelity, good insights into what your expenses will be)
What Will You Spend in Retirement (from Fidelity, includes a nifty calculator)
So You’re Turning 65: Your Medicare Guide 101
Doing the Numbers on Health Care Costs in Retirement

Posted by Admin on November 25th, 2013


  1. We investigated long term health care insurance and find that it is no more understandable than when it first came on the market. My parents paid about $70,000 in premiums in to the insurance over the years, just to find that payout was minimal when needed. One insurance policy that was interesting involved paying the premiums up front. It acted as a life insurance policy as well, had a survivor benefit if LT care was never an issue, and you could get your initial payment back if you decided to cancel. It was suggested that we put $50K in each, but when I looked at how that money would grow, allowing us to pay our own fees, we decided to self insure. While it is possible that we both may need LT care, it is not probable, and the insurance could not be co-mingled. If we self insured we would have twice the purchase power for health care, and keep our principal and earnings if we did not need to use it for health care. As young retirees we have time on our side, and funds can build, while the insurance would pay out large sums right out the gate if something happened, so that is one risk we are taking on. So while we have decided self insuring for long term care is the way for us to go, the exercise made us realize that we had to set aside an IRA with $100,000 in it and not use those funds to pay for our daily retirement needs.

    by Julie — November 26, 2013

  2. As early retirees with retiree health care insurance offered by our company, we face the uncertainty of this healthcare option being cancelled by work at a whim. Because there are pre-existing conditions to insure, we budgeted $20,000 a year above and beyond our expenses in case we had to scramble to pay for individual health insurance. We are very eager to get a better handle on the ACA, and how that will impact our budget needs. That extra money would make for a much nicer retirement, which for us has been tightly budgeted to allow for an early work exit.

    by Julie — November 26, 2013

  3. And obviously the majority of retirees do not have this amount of money set aside for health care expenses in retirement.

    by Bubbajog — November 26, 2013

  4. I understand that bubbajog, but some might have the assets, so it’s worth putting here. There is no one size fits all solution, others will have to do other things. Also some readers may be looking at this board because they are starting to plan for a retirement down the road. I’ve been saving 20+% of my income towards retirement since I first started a real job, married someone with similar savings ethic, and have learned how to make my money work for me through investments until recently passing that job onto someone else. Surely I am not the only one with funds available, and I won’t apologize for working hard, being disciplined and benefiting from some good luck to get here. To bring this back to the topic, what I noticed with my parents was that as they aged they became less capable of managing their funds, but Dad refused to see his limitations and seemingly became more aggressive with them to compensate for his feelings of inadequacy. So in his mid-80’s he decided to stop paying on his long term health care, figuring they had already stole $70,000 from him in premiums without offering a good product. Self insuring is one way to protect oneself from one’s older self. Setting aside buckets of income for various expenses which may or may not happen, in this case setting aside an account that will act both as a fund to pay LT health care but also an emergency fund, also works in what will be a low income retirement. We are getting out early so that DH does not die behind his desk, but it won’t be to take world cruises. It’s not worth waiting for a high budget retirement if I have to do it without my best friend.

    by Julie — November 27, 2013

  5. Julie – I agree with you. You can be proud of your planning and self-discipline to save no matter what.

    Our story is similar, but we chose a good LTC policy at 55 and are happy with the protection despite the cost.

    unfortunately, retirement is too late to start dealing with ALL the concerns. With 20 years to go, a person CAN have a decent if still budgeted retirement. If you have to start late, any effort wi11 help in the long term. You have to start when you can and be disciplined (self restraint). Finally starting at 35, my wife and I don’t feel we missed out on much and though we must budget, we continue to get along Ok even since our early retirement at 55 ten years ago.

    The point isn’t to glory, but to encourage others to GET STARTED. Whenever!

    by Rich — November 27, 2013

  6. Just wanted to lend support to what both Julie and Rich have said. Not everyone has the means to self-insure, but if you do it can be a better option with more flexibility and upside. Also, their advice for increasing the probability of having the financial means to self-insure in retirement is spot on. Start early, exercise restraint, and live within your means after you have set aside a budgeted amount for savings/investing.

    by Jim — November 27, 2013

  7. Julie – I agree with your self-insurance approach. One of the beauties of the Roth IRA is you never have to take distributions. I opened Roth IRA’s for my wife and myself with the idea that those funds would be available for unexpected costs such as long term care, burial, medical costs not covered by insurance, etc. And if we’re lucky and never have to tap our Roth’s then we can leave them to the children. We don’t have a lot in our Roth’s, and now that I am retired, I’m not adding to them, but hopefully they will grow over the years.
    With regard to LTC policies, I just felt the premiums were too high and the companies offering them often seem to change the terms to their benefit or stop offering them and got out of the business if they weren’t making enough money.

    by Leonard — November 27, 2013

  8. Rich: “… we chose a good LTC policy at 55 and are happy with the protection despite the cost.” Rich, how did you decipher what they plan to pay? The policies I looked at seemed to contain so much double speak as to be almost unreadable! The other thing I worry about is the solvency of the insurer. If they go belly up, what will you get for all the premiums you paid? I realize that there is the possibility of a market meltdown killing my investments as well, but we are pretty well diversified…much more so than the one company we would be insuring through if we did not self insure! RE investing early and using Roths, we have had our kids open a Roth and max out their contribution which we subsidize until they are through college. Their watching their money compound every year has been a much stronger lesson in why to invest early than any words that come out of our mouth. Would love to see a third generation of my family and beyond retire early!

    by Julie — November 27, 2013

  9. Julie; the best planning and most stringent savings doesn’t mean you will have funds in retirement. In the 2008 financial crisis, many pension plans were bankrupted when Lehman brothers went bankrupt. People had worked all their lives, relying on those benefits then…pouf…they were gone. I invested over 200k of my funds in a company called Merendon mining, which was well presented and had been paying good dividends to a number of my friends. And it turned out to be a Ponzi scheme and all my money was stolen. I lost more when the market crashed. If you have managed to keep your resources intact, then you are very lucky. But I think everyone should really have concern about their investment income, given the country’s current financial state. Your money might not be as safe as you think.

    by Ginger — November 28, 2013

  10. I’m rapidly approaching retirement (turn 66 in January) and I’m actively weighing “insurance vs. self-funding” for long-term care. Concurrently, I’m assisting my parents (both in their 90’s) with the claim process for LTC insurance they started 22 years ago. They both moved into assisted living facilities this year. My father has advanced dementia and LTC insurance is covering most of his expenses. However, my mother has macular degeneration and only mild dementia. Her LTC insurance won’t pay benefits although she clearly needs assistance on a daily basis.
    Typically LTC benefits require that an individual need assistance with at least two “activities of daily living”. Very poor vision or even total blindness doesn’t count if you can perform most of the ADL’s. Insurance companies typically define ADL’s as toileting, bathing, feeding (plate to mouth), eating (chew and swallow), mobility (bed to wheelchair), grooming (brushing teeth), and taking medication. Cooking, shopping for groceries, and housekeeping typically aren’t covered. Hence, LTC insurance may not start paying benefits when you need them.
    The self-funding approach allows a person to use savings as they see best.
    BTW, don’t assume successfully filing a claim will be easy. You need to have someone you trust and with a high level of persistence to help with the claim process.

    by Geoff — November 28, 2013

  11. I have been preparing for retirement for over 20 years. I am 62 and will have a pension and social security. I have several different retirement accounts to fall back on if needed. Self insuring against the unknown is good planning. My wife will have her pension and social security when she reaches retirement age. She is five years younger than I am. I feel better about my future knowing I will be in control and not at the mercy of the changing insurance industry. People will all find their own peace of mind with different retirement planning. With the several large retirement accounts I have I feel confident that they are growing nicely and barring any unforeseen calamitys I hope to enjoy a long enjoyable retirement. Remember you have to go with makes you comfortable, not with what will make somebody else comfortable.

    by Steven — November 28, 2013

  12. I understand that this is a product that is part of some peoples’ planning, and that it has value for many people (and since my spouse had been a financial planner, I also understand the commissions). Ultimately, this becomes a very personal decision based an individual circumstances. My spouse became terminally ill with a degenerative disease in 50s, and was required to be placed into a nursing home for a few years before dying. My spouse received exactly the same care, in the same nursing home with the same staff, during the periods that we were private pay and after qualifying for Medicaid ($8,000+ per month). Admittedly, getting my spouse into a good nursing home was much easier as a private pay patient than if my spouse had been a Medicaid patient from the beginning. As the years passed, I learned from other visiting family members that there were some people on the ward who were playing with LTC insurance.

    Admittedly, with LTC insurance I wouldn’t have had to use family assets for private pay for so long (however, in our state my 401K and IRA, the family home, a car and one-half of spousal assets up to approximately $109,000) were exempt for Medicaid purposes anyway. On the other hand, when my spouse became ill I priced LTC insurance for myself and received quotes in excess of $1,000 per month. I’m not sure that the cost vs. benefits payable would have resulted in a net benefit at the end of the day.

    And as others have mentioned, it’s always important to read the policy and understand what you’re purchasing. I have met many people who mentioned being disappointed that their loved ones’ LTC policies didn’t cover home care.

    Ultimately, I decided to self-insure, and to buy a life insurance policy to cover the present value of my estate. If my assets end up being used for long term care and I am unable to pay premiums on the policy, my kids can choose to pay the remaining premiums for the life insurance to protect their inheritance.

    by Ted — November 29, 2013

  13. Ginger, while I am sorry to hear that you went through what you did, there is a reason why the first rule of investing is to manage your risk, particularly through diversification. Yes, anything is possible, but one can only plan for the probable. I have been through some serious declines with my high octane investing approach, but with a cast iron stomach towards volatility have always come out ahead, often putting more cash in to a stock when down knowing it was fear causing the market to plunge not company financials. Anyone who tells you an investment will only go up, up, up should be run from hard. This close to retirement I have given much of our funds over to a financial planner who knows how to properly diversify outside of the stock market and outside of the US, and will at some point be able to fall back on multiple pensions as well as social security. With a paid off house and low property taxes, most of our expenses are discretionary and can be cut out in bad return years. Keeping 5 years of basic expenses in cash, we should not be forced to redeem assets at their lows in order to eat. We are controlling what we can and not obsessing about the rest, feeling reasonably prepared given the depth to which we have thought this out. I don’t know what more we can do other than that.

    by Julie — November 29, 2013

  14. This was from a recent USA Today article (by John Waggoner) about choosing a long-term care policy: “In September, John Hancock raised some of its long-term care premiums 40%…Look for the companies with the lowest premium increases the past 10 years. Two suggestions: Northwest Mutual and New York Life.”

    by Jan Cullinane — December 4, 2013

  15. […] Further Reference: See “Which of These 7 Fantasies Could Wreck Your Retirement” The Biggest Unexpected Retirement Expense You Never Thought of Not So Much, A Million Dollars for Retirement EBRI- Confidence Returns for Those with Retirement […]

    by » The Kids Are Through College, You Retire Next Month, and You’re Dead Broke. What’s Next? Topretirements — June 30, 2014

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