Health care costs remain a top financial concern among Americans. According to a 2013 Merrill Lynch Retirement Study conducted in partnership with Age Wave, health problems and the cost of health care now top the list of retirement worries—yet just one in nine pre-retirees is completely confident in his or her ability to pay for retirement health care expenses. In addition, though many associate early retirement with financial success, loss of health is the top reason people retire earlier than expected.
Factoring in your anticipated—and unexpected—health care costs when planning for retirement is an often overlooked but critical step. You’ve worked hard to build your wealth, so it’s just as important to protect it. To give yourself a greater degree of comfort during your golden years, here are a few steps you can take to help you feel more prepared.
Plan early. Even if you’re in tip-top shape now, you may not always be. According to a recent study from West Virginia University, baby boomers are experiencing higher rates of chronic disease and disability than members of the previous generation at the same age, despite the fact their life expectancy has increased. This can lead many boomers to greater health care needs as they age.
While you may not be able to predict what happens to you in retirement, you can plan ahead to have more options and greater financial flexibility. Thoughtful preparation can help minimize certain risks. You can begin by creating or updating a personal road map that identifies your goals. It’s also important to coordinate your plans with those you care about. Keep your family informed of your needs and goals and let them know how they can play a role in your decisions. From there, you can begin crafting a strategy and selecting options that meet those goals. The earlier you start, the more time you’ll have to anticipate how your different income sources will meet what you’ve envisioned.
Estimate health care costs in retirement. Within your personal road map, you’ll want to have an estimate of health care costs in retirement. Health care costs are expected to rise in the coming years, and out-of-pocket medical expenses will likely significantly influence your retirement income. According to the “Expenditures of the Aged Chartbook, 2010,” a report that was released from the Social Security Administration this year, out-of-pocket health care expenses accounted for 13.2 percent of retirees’ expenditures. To get an estimate for your needs, evaluate your health care coverage choices and costs annually and make adjustments accordingly. Also, identify what Medicare doesn’t cover. The costs of deductibles, co-insurance and medical expenses are not covered by Medicare, so they can quickly add up and negatively impact your retirement income. Additionally, Medicare doesn’t cover assisted living and long-term care expenses.
Other expenses you’ll need to consider include Medicare premiums, Medicare co-payments, prescription drugs, Medicare supplement insurance and pre-Medicare insurance. Pay attention to the current state of your health and lifestyle as they influence your life expectancy and what health care needs you might expect. There are many online retirement resources that can help you map out where health care fits into your overall retirement plans, such as Merrill Lynch’s “Retirement income planning worksheet.”
Have a plan for long-term care. Along with anticipating expenses, create a contingency plan for unexpected expenses such as long-term care. You’ll want to consider your likelihood of needing care, the types of care available, housing costs, as well as how long-term care might be needed. Some options include home care, nursing home care or assisted living. Start early and have open discussions with your family about potential solutions for you. Together, you can research options that suit your unique needs and budget. Reviewing these factors ahead of time can help you and your family make more informed decisions.
Update and adjust accordingly. Health care plans and costs are always changing, so it’s important to review your strategy regularly and update and adjust accordingly. With these anticipated costs in mind, you can help ensure your retirement income can meet the expense of these needs. The earlier you start, the better, as you’ll have more time to adjust your strategy, if needed—whether it’s saving more, reallocating investments, cutting back on discretionary spending, delaying retirement or working during retirement.
Careful analysis and preparation of potential health care costs can improve the likelihood that your assets will meet your desired retirement lifestyle. While health care costs are a major component of your retirement plans, remember how they fit in with your larger retirement picture. Don’t be afraid to seek help—collaborating with your loved ones and a trusted financial professional through this process can help you on the way to the retirement lifestyle you want.
Laura Pilz is a wealth management adviser for Merrill Lynch, Pierce, Fenner & Smith Inc., a registered broker-dealer, Member SIPC, and a wholly owned subsidiary of Bank of America Corp. You can reach her at (415) 955-3944 or www.fa.ml.com/Laura_Pilz .
