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How to Estimate Your Health Care Costs in Retirement

A new, free tool from Nationwide Insurance can help you rough out your second biggest expense in retirement

posted by Richard Eisenberg, May 7, 2012 More by this author

first aid kit filled with cash

Richard Eisenberg is the senior Web editor of the Money & Security and Work & Purpose channels of Next Avenue and Assistant Managing Editor for the site. Follow him on Twitter @richeis315.


first aid kit filled with cash
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When it comes to financial planning, there’s one frightening, enormous number that no one wants to think about — the amount you’ll need to pay for healthcare after you retire. It's the second biggest retirement expense after housing: A couple who is now 65 and who’ll live another 20 years or so will need to shell out between $250,000 and $430,000 on average (not including nursing-home care costs), according to Fidelity Consulting Services. That could be as much as $10,750 a year per person. Ouch.
 
Of course, no one’s really “average.” And this raises the question: Do you have a clue how much money you might need to cover your health costs in retirement?

Personal Health Care Assessment

If not, you might want to try using a new tool from Nationwide Insurance, the software firm HealthView Services, and the actuarial firm Milliman and Associates. Called the Personal Health Care Assessment, it's designed to help you estimate your out-of-pocket healthcare costs in retirement. I’ve analyzed it and think it’s pretty useful.
 
“We did some research with our financial advisors and clients and found that pre-retirees and people entering retirement today are terrified of their future health care costs,” says Kevin McGarry, director of the Nationwide Institute for Retirement Income. “

They're also wildly off in estimating those costs. A Nationwide Financial survey released today found that soon-to-be-retired Americans with at least $250,000 in household assets estimated Medicare would pay for 68 percent of their healthcare costs in retirement. In reality, Medicare currently covers only about 51 percent of those expenses, according to the Employee Benefit Research Institute.
 
The Personal Health Care Assessment can help you get closer to the mark. It’s free, and you can get the form from a financial adviser who works with Nationwide; you need to be the adviser's client or become one. Here’s how the tool works:
 
Step One: A Simple Questionnaire

First, you fill out a short, one-page questionnaire, answering 10 yes-or-no questions about your health, estimating your annual income at retirement, and noting the type of Medicare coverage you’ll choose as well as the rate of return you expect to earn on your investments before and after you retire.
 
The health questions don’t require you to know your exact medical numbers, like blood pressure or cholesterol. Their aim is just to determine whether you have health issues that could affect your healthcare costs. To that end, you need to say whether or not you have been diagnosed with high blood pressure, high cholesterol, type 2 diabetes or cancer; are or ever were a tobacco user; exercise at least two hours a week; have a healthy, well-balanced diet; and have a family history of diabetes or cardiovascular disease.
 
Estimating your annual income at the start of retirement helps Nationwide determine your premiums for Medicare Parts B and D, since these programs charge increasingly more once your income tops $85,000 if you’re either single or married and file separate tax returns, or $170,000 if you’re married and file jointly.
 
What You'll Get

Two or three days after you fill out the questionnaire, you’ll receive your Personal Health Care Assessment report, which estimates the total amount you’ll need in savings to pay for potential healthcare costs in retirement, your average health expenses over successive five-year periods, and (brace yourself) your life expectancy.
 
In two examples that Nationwide showed me for healthy married couples with anticipated annual incomes of $170,000 or less at retirement, the 65-year-old couple would face an estimated $222,900 in total healthcare costs over their expected lifetime and the 55-year-old couple would be looking at $383,350.
 
Caveats About the Health Care Assessment Tool

Of course, you need to take this tool with a big grain of salt (although that amount of sodium could raise your healthcare costs). Not only is it impossible to know what your health will be like over the next few decades, it’s also impossible to know exactly how the cost of Medicare and healthcare in America will change. Still, it’s a good place to start.
 
“We recommend filling out the Health Care Assessment on a yearly basis as well as anytime you develop a medical condition,” says McGarry.
 
Keep in mind that the estimate you'll receive won’t include long-term-care costs, which could be a significant out-of-pocket expense. "In our survey, people thought Medicare covers long-term care expenses," says John Carter, president of Nationwide Financial Distributors. "It doesn't." Nationwide is working on a new tool for that and hopes to have it ready in a few months.
 
So far, about 2,000 people have used the Health Care Assessment tool. “The response has been very positive,” says McGarry. “People say, ‘This is the missing link. Now I can plan more effectively for retirement.’”
 
What to Do Next

What should you do about your healthcare costs estimate after you receive it?
 
For one thing, you’ll probably want to start saving and investing even more than you’re already doing. (Of course, the Nationwide adviser would be happy to offer some investment and insurance products to help.)
 
If you’re nearing 65, you can start researching ways to lower your out-of-pocket costs once Medicare kicks in. Next Avenue has an article on how to prepare to enroll in Medicare.
 
Finally, staring at your number could be the incentive you need to start exercising more and eating better. And taking action on both of those fronts just might help you lower that numbing figure, so you can use more of your savings to enjoy retirement.