Taking Your Lumps

Richard Quinn

READ THE MEDIA AND you’ll likely be convinced that health care costs in retirement will be overwhelming. One example: The Motley Fool says the average couple will need $400,000 for retirement health care expenses—if they’re healthy.

Pretty scary stuff. But let’s be realistic: Every ongoing living expense stated as a lump sum looks scary. For instance, my total property taxes over my retirement will come to $435,000, excluding annual increases.

Not reassured? Consider this from a recent study by the Employee Benefit Research Institute: “For the majority of surveyed people, out-of-pocket health care expenses are not as high as commonly believed. For those who die at age 95 or later, the median cumulative out-of-pocket expense after age 70 until death is slightly above $27,000.”

On top of those out-of-pocket (OOP) costs, you’ll also need to pay various insurance premiums. These two expenses will vary based on one’s income in retirement (Medicare premiums are income-based), coverage selected (traditional Medicare or Medicare Advantage, plus any Medigap plan and Part D prescription drug benefit), individual health care needs and, to some extent, location.

Many people will find that their monthly premiums in retirement will be higher than during their working years, especially if they had received benefits through their employer. But that’s a reason to plan, not to panic.

In 2018, the majority of Medicare beneficiaries pay the standard Part B premium of $134 per month and the average but variable premium of $35 for the Part D prescription drug benefit. For those individuals with incomes above $85,000 a year, these premiums will be considerably higher. Be happy: You’re considered wealthy.

On top of this, you may have a premium for a Medicap plan, which helps insulate you from potentially high OOP costs. While costs vary widely, figure $225 per month for Medigap coverage. If you’re married, you’ll need to double all of these various premium amounts. Result? Unless you have a high income, total premiums should average $788 a month for a couple, equal to $9,456 per year. A 30-year retirement gets a couple to the scary number of $283,680.

Meanwhile, coping with OOP expenses requires some planning. I’d advise setting up a “health expense risk” fund. If you’re enrolled in a qualified high-deductible health plan, the best tool is a Health Savings Account (HSA). You can set aside funds pretax during your working years, invest them for growth and then use the proceeds tax-free in retirement for health care expenses. In the absence of an HSA, simply setting up an account earmarked for OOP expenses will ease your financial stress in retirement.

The last risk is long-term care (LTC). If you don’t have LTC insurance, you’re on your own—unless you deplete almost all your assets, at which point Medicaid kicks in. Those concerned with protecting assets from LTC expenses should seek specialized financial and legal advice that’s customized to their financial situation and to the state where they live.

How much risk is there? About 69% of seniors will need some type of long-term care. But that includes both in-patient and at-home care—and both paid care and care provided by family and friends. An estimated 42% of  seniors will require paid in-home care, 35% will need nursing home care and 13% will require care in an assisted living facility, with care typically lasting one year or less. Still, make no mistake: There is a significant financial risk—and, if you’re unlucky, the dollars involved could be large.

Richard Quinn blogs at Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Pain PostponedSharing It and What Motivates Me. Follow Dick on Twitter @QuinnsComments.

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