Avoid Retirement Health-Care Mistakes
The typical health-care tab will run $240,000, but could run much higher.
Retirement health-care costs are enough to cause a severe anxiety attack. Even with Medicare benefits, a 65-year-old couple retiring in 2012 will spend at least $240,000 in retirement, according to the latest estimate from Fidelity Investments.
That doesn't include long-term-care costs, over-the-counter medications and most dental costs.
Plus, that $240,000 estimate is based on average life expectancy for a 65-year-old -- the husband living until age 82 and the wife until 85 -- but "average" means half of people live longer than that.
In other words, that 65-year-old couple may well need much more than $240,000.
No wonder almost half of wealthy Americans close to retirement said they are extremely worried about the effect health-care costs will have on their plans, according to a recent survey, by Harris Interactive for Nationwide Financial, of people with more than $250,000 in household assets.
"When you're young, you can't envision what it's actually going to cost you," said Henry Hebeler, a former Boeing executive who created AnalyzeNow.com, a retirement-planning website.
"As you get older, that's when you start having the medical bills," said the 78-year-old Hebeler. "I missed one day of work for sickness in 33 years at Boeing. And then I retired," he said.
Despite being relatively healthy -- he and his wife still ski, for instance -- he's been in the hospital a number of times since retiring, he said, including for knee surgery. He details some of his experiences on his website.
Get your budget straight
If you're still in the retirement-planning stage, you might be envisioning lower living costs -- no more commuting, buying business attire, setting aside huge sums for retirement.
But prepare now to see those costs replaced by others. Hebeler said he and his wife, despite being in good health, have experienced a couple of years of $40,000 annual medical expenses, even with Medicare coverage.
A hypothetical 65-year-old couple, retiring this year with $75,000 in household income, should expect to pay about $10,500 for health care, according to Fidelity.
Keep in mind that Medicare doesn't cover most dental work, hearing aids and long-term care.
Top-of-the-line hearing aids can cost as much as $5,000. "You can get very inexpensive hearing aids," Hebeler said. "They're not anywhere as good."
Medicare isn't free
Costs add up due in part to what's not covered by Medicare, but Medicare premiums and copays are not insignificant.
Some Medicare premiums are deducted directly from your Social Security checks. Medicare Part B alone currently costs a couple about $2,400 per year. Higher-income beneficiaries pay more.
(Medicare Part B covers doctors and some other services not covered by Part A, which covers hospital services. Most beneficiaries don't pay a premium for Part A.) You'll probably want to buy Part D, too, for prescription drugs.
Then there's your Medigap policy, to cover expenses not covered by Medicare. Medigap premiums vary widely, but a couple might easily pay about $4,000 a year. Go to Medicare.gov for more information.
"Medicare covers 80% of your doctor's bill and a good deal of your hospital bills," Hebeler said. "The Medigap insurance only covers the last 20% of your doctors' bills -- but the premiums are much, much higher than Medicare."
Fidelity's cost estimate assumes the health-care law stays in effect (the Supreme Court is expected to decide on the constitutionality of that law in June). A year ago, Fidelity's annual health-cost estimate fell by $20,000, to $230,000, thanks to provisions in the health-care reform law that reduce prescription-drug costs for older Americans. Read: Health law's demise would save big bucks -- for some.
Don't retire early
If you can stay in the workforce until you turn 65 and become Medicare-eligible, your retirement savings will thank you.
You might pay as much as $30,000 a year for bare-bones health insurance if you retire before you're eligible for Medicare, Hebeler said.
Fidelity assumes the couple retires at 65. "If you decide to retire at 63, you're talking quite a bit of money for those two years," said Sunit Patel, senior vice president of Fidelity Benefits Consulting.
Care for yourself
Maybe exercise and healthy eating simply have not been a lifestyle focus for you. But the idea of shelling out, say, $50,000 or more each year in retirement may shock some people into making changes.
"Many people, right after they get done working, they don't do very much," Hebeler said. "They start traveling, they eat a lot, life is easy. They don't exercise like they should."
Budget for routine costs
"I break health-care costs down into two types of costs," said Katy Votava, founder and president of Goodcare.com, a consulting firm that works with financial advisers and their clients to help them manage health-care costs.
"One is an expense that you need to budget for on an annual basis -- your routine health-care costs," she said, including premiums, co-payments and other predictable costs.
"You need to put that in your budget the way you put in housing, food, clothing," she said.
But use a different rate of inflation; Votava assumes 6% to 8% annual increases. "Health-cost inflation runs two-to-four times the CPI."
Once you have your expenses budgeted, look at your savings and other income sources to assess how you're going to cover that annual recurring expense.
"For most people, that's the biggest piece of it," Votava said. "Long-term care, that's the wild card, but everybody will have routine health-care costs."
Insure against the unknown
About one third of today's 65-year-olds may never need long-term care, but another 20% will need care for longer than five years, according to the National Clearinghouse for Long-Term-Care Information, a site of the U.S. Department of Health and Human Services.
"How do you cover any risk? You look at your whole financial picture and figure out what piece of that you might cover with an insurance product of some sort," Votava said.
That might mean purchasing long-term-care insurance, though that product has disadvantages, too. Read: Long-term-care insurance: Most still don't buy in.
Still, that insurance means you have choices that you don't get if you instead tap into Medicaid. "I have a client right now who is shelling out a lot of money to care for his aunt," Votava said. "He looked at the Medicaid assisted-living facility and he couldn't stand to move her."
If you choose not to buy long-term-care insurance (and you don't have enough money to self-insure) and you end up needing care, likely you will spend down your assets until you're eligible for Medicaid. Not an ideal solution but reality for many.
Shop wisely for Medicare
Many Medicare beneficiaries are paying more than need to, Votava said. "People could save money on their routine costs if they knew how to shop for and choose the right Medicare plan."
Make sure the plan you choose covers your medications, and don't assume your former employer's plan is the most cost-effective. Votava said she saved one couple $8,000 a year. "They were in an employer-based Medicare plan that was pricey."
Also, consider shopping around for your Medicare plan annually. Said Votava: "The costs change every year."