Medical expenses can account for a large portion of spending during a client’s retirement years. According to a recent survey by Fidelity Investments, a 65-year-old couple retiring in 2012 medical costs during retirement are projected to total $240,000. This amounts to a 4% increase over the estimate from last year. Smart Money discusses health-care costs and mistakes to avoid when planning for health-care expenses. Highlights of five mistakes to help your clients avoid are included below. Read the article from Smart Money for more tips and information.
Avoid Retirement Health-Care Mistakes
1) Planning for Average Medical Expenses
Help your clients avoid the mistake of just planning for the average estimated health-care expense of $240,000. “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.” Many couples will face cost much higher than the average $240,000.
2) Expecting Lower Expenses in Retirement
Often people expect their expenses to decrease when they retire, especially when considering costs that will be eliminated by no longer working, like keeping up a business wardrobe, daily travel to work, or frequent lunch outings. While some expenses will be lower, financial planners need to remind their clients the expense of medical costs will be higher, as they will no longer be covered by health insurance though their employer. Most people will be eligible for Medicare when they reach 65, but Medicare does not cover all medical costs and it is not free.
3) Overlooking Insurance Cost When Retiring Prior to 65
If your clients are looking to retire prior to 65, the additional medical expenses can add up quickly without any company medical insurance or government Medicare and require a substantial drawdown of savings in the early retirement years. “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.” Help the clients understand the true cost of early retirement and make sure to include the cost of insurance for the years of retirement that occur prior to age 65 in their retirement projection.
4) Not Using a Higher Inflation Rate on Medical Costs
When budgeting for health-care costs, clients need to include known costs, like premiums, co-payments, and use higher than average inflation rate to project these costs into the future. “”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.””
5) Failing to Plan for Unexpected Medical Costs
You will also want to make sure your clients plan for unknown medical costs, like long-term care. Financial planners can help their clients determine how to best protect against the risk of any unexpected costly health related expenses. “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.”