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.
– 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