Projecting the Cost of Health Care in Retirement
For most, the largest unknown cost during retirement is the cost of health care. When working on a Retirement Feasibility or Portfolio Sustainability Analysis, we are very careful to realistically consider these costs and the possible impact that they may have on a retirement plan outcome. Consider the following:
Fidelity Benefits Consulting estimated that a 65-year-old couple retiring in 2013 could expect to spend $220,000 on health care related costs in retirement. This estimate covers all deductibles, co-pays and co-insurance for Medicare Parts A, B and D, but excludes long term care expenses, dental costs and over-the-counter medications.
Genworth’s 2013 Cost of Care study on long term care expenses found that the average cost of nursing home care nationwide is $83,950 per year ($77,500 in NC). It is important to point out that the annual cost of care can vary substantially depending on the facility and level of care provided.
Under coverage provided by the Affordable Care Act, a retired couple aged 62 can expect to pay about $2,000/month (the Platinum Plan) for health insurance. This insurance cost would total about $72,000 for this 3 year “bridge” to Medicare.
The Impact of Inflation
While inflation levels for general spending have remained relatively tame, inflation rates on medical-related costs have continued to rise at a 5% to 6% clip. Many experts suggest that health care costs for retirees are likely to continue to rise even with health care reform.As seniors and pre-retirees alike formulate their spending projections, it is important that these inflation-adjusted health care costs are considered. Failing to do so can create a false sense of security that assets will last throughout retirement.
When it comes to paying for health-related costs, the decision of “which account” has never been more important. For example, taking a disbursement from an IRA or 401k plan to cover long term care expenses of $85,000 will likely require a disbursement that exceeds $120,000 when factoring in the tax cost!The decision of "which account" is also important for those in the “accumulation phase” as you need to have an eye towards account diversification when saving for retirement.
Saving to accounts with varying tax attributes (401k, Roth IRA, Personal Brokerage account, etc.) is a key component of this process.
We all know people who have lived into their late 90s. The Fidelity study referenced above, assumes a life expectancy of 82 and 85 for a husband and wife respectively. While this life expectancy may be a realistic average across the population of current 65 year olds, we believe that when making retirement or portfolio sustainability projections, it is important to assume an extended longevity – especially as it involves health-related costs.
When it comes to projecting health care costs, everyone is different. Family history, personal experiences and individual preferences all play an important role. For example, some people would prefer obtaining long term care insurance that would fully cover all long term care costs. There are others who would rather self-insure and pay potential long term care costs out of pocket.
It is important to examine the impact of these personal preferences in the context of the Retirement Feasibility Analysis.
A sound retirement plan will explore, not only the variability with health care costs, but also a host of other scenarios with the purpose of “stress testing” your plan. Going through this exercise can help pinpoint weaknesses, as well as lead to the discovery of solutions that will help your assets most effectively work for you! If you have any questions, please feel free to contact our office.