(This article appeared previously on MarketWatch.com.)
A whopping 84 percent of Americans are worried about being able to pay their healthcare costs in retirement, according to a new survey from Fidelity Investments. Not surprising, perhaps, given that Fidelity pegs total average outlays for health expenses in retirement at $220,000 for a couple who lives to average life expectancy.
And that figure doesn’t include over-the-counter medications, many dental expenses and long-term care
. Financial advisers said the $220,000 figure is a likely scenario for retirees and that their clients are often shocked at healthcost estimates.
Health care “is the single most expensive thing they will face outside of homeownership in their lifetime,” said Cary Guffey, a certified financial planner with PNC Investments.
There Are No 'Average' Healthcare Costs
But don’t forget: that $220,000 is an average cost. Retirees’ real-world experiences vary widely, because individuals face vastly different health outcomes.
“There is no such thing as an average healthcare expenditure,” said Robert Friedland, a certified financial planner in Rockville, Md. “Averages are just not meaningful; if they were, then health insurance would not be so important.”
Katy Votava, president of health-care consulting firm Goodcare.com
, expressed a similar opinion. “Averages on healthcare costs overestimate for most people and underestimate for some,” she said.
But too many Americans seem to believe they’ll be on the lucky side of the health-cost ledger
. Fully 71 percent of respondents in the Fidelity survey said their health will be “better than average” in retirement.
Pre-retirees also tend to underestimate their retirement health costs: Among people aged 55 to 64, almost half of them predicted they’d need a total of $50,000 to pay for their retirement health expenses, according to Fidelity’s research.
But by Votava’s estimates, a Medicare beneficiary whose adjusted gross income is about $85,000 ($170,000 if married filing jointly) will spend an average of about $8,000 a year on routine medical expenses in retirement. And that figure will rise each year, thanks to the relatively high inflation rate of health costs.
Prepare to Spend More Than You Expect
“There’s a huge amount of sticker shock when people retire. That can be avoided by planning ahead,” Votava said. “Plan for the routine and then it’ll be clearer to you how much money you have left over to cover a long-term-care event if it happens.”
Still, if you’ve been paying for health care throughout your working life, or maybe you retired before age 65 and have been paying for an individual health plan, your retirement health costs may not be that surprising. “The costs are more palatable for those clients that were paying their own premiums before they retired,” said Brett Horowitz, a vice president and wealth manager with Evensky & Katz in Coral Gables, Fla. “Many have indicated that their healthcare costs have gone down once they were eligible for Medicare.”
Others agreed. “Most clients don’t have stifling costs as Medicare and the supplement programs seem to adequately provide for most,” says Rick Kahler, a certified financial planner and founder of Kahler Financial Group in Rapid City, S.D.
The dealbreaker is often long-term care. “I see the worst of the expenses when a person goes into long-term care,” Kahler said.
Here are six tips for avoiding health cost sticker shock in retirement:
Have a Plan
Instead of fainting at that eye-popping six-figure number, break it down into annual costs. “I build in annual spending that increases more than inflation,” Friedland said.
Votava tells clients to increase her estimated $8,000 a year in health care expenses at the start of retirement by about 6 to 8 percent a year, because “health-care inflation runs two to four times’ general inflation.”
Don’t Count on Your Employer Plan
Some workers are lucky: They enjoy employer-provided health care. Just don’t count on that coverage continuing, Votava said.
“I recommend that folks who think they have coverage in retirement still plan as though they don’t. It’s better to have money to cover something and then find out you don’t need it,” she said, noting that even those employers who continue to offer coverage to retirees are hiking costs.
Votava said she’s worked with retirees who found their employer-plan costs jumping to $600 or $900 a month. “They never expected to pay those costs.”
If you’re still working and expect to receive employer coverage as a retiree, talk to your Human Resources department. “There are very few people who, five years before they retire, go to HR and ask, ‘How will these benefits interact with Medicare?’” Guffey said.
Do Your Medicare Homework
It’s crucial to figure out which Medicare plan is best
for you. Too often, Votava said, “Retirees buy a plan that doesn’t meet their individual needs and then they’re paying a lot out of pocket.”
Choosing the wrong plan — one that doesn’t cover your prescription drugs at the best rate, for example — can be a costly mistake.
Also, if you choose to delay Medicare past age 65 (that might be the case, say, if you work until 65 and then take 18 months of Cobra insurance) you may be subject to penalties. Those “late enrollment” penalties are as much as 10 percent to 12 percent of your premium costs every year.
“You have to know when to get in, when you can delay and when you will be eligible for a special enrollment period at a later date,” Votava said. “Understand the rules [because] once you’re in a penalty position, you’re in a penalty position forever.”
Also, when you’re budgeting for medical costs, don’t forget that Medicare doesn’t cover most dental expenses, long-term care and other costs.
Another Medicare strategy to consider: Keep an eye on your modified adjusted gross income relative to the income brackets for Medicare premiums.
“If you’re close to a bracket, sometimes people can adjust their investment income situation such that they don’t go up into the next bracket,” Votava said. For example, a retiree could use Roth IRA distributions which are not counted in the premium calculation.
Plan for Long-Term Care
An unexpected nursing-home visit is perhaps the biggest dealbreaker for a retiree’s budget.
“The one event that most people are less prepared for is a long-term-care incident,” Horowitz said. “It can take a large bite out of someone’s nest egg. We always recommend long-term-care insurance
unless someone can self-insure.”
In his planning process, Kahler said, “We routinely put an estimate for these expenses into every plan and either self-fund for them, use insurance or a combination of both. We use an estimate of about $225,000 for each person, which is about three years in a nursing home. We also assume they will have additional ancillary costs of $24,000 a year at the end of life.”
Consider Hiiring a Consultant
At his firm, Horowitz said, advisers often connect clients with a healthcare specialist who charges by the hour.
“Even the healthcare consultant that we recommend sometimes has a hard time understanding the facts, because each situation is different,” he said. “When someone has multiple policies — private health care, Medicare and Medigap
— the rules are not always clear who pays first.”
Eat Well and Exercise
It’s obvious, but essential: Take care of yourself to reduce the likelihood of needing pricey health care as you age.
“The only way to have some control over your healthcare costs is to eat well and exercise,” Horowitz said.
Added Guffey: “Healthy people cost less to provide health care to than sick people. That’s kind of obvious, but it’s true."
Andrea Coombes is a personal-finance writer and editor in San Francisco. She's on Twitter @andreacoombes.
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