By STEVEN C. FINKELSTEIN and MEGAN E. GEHRMAN
When you’re planning for retirement, there’s one subject that’s not nearly as fun to think about as travel or a vacation home. But before you buy those cruise tickets or put a down payment on that lakeside cabin, you’ll need to estimate how much to stash away for medical care.
Many Americans wrongly assume that Medicare will pay for all or most of their health care services after they retire. In fact, Medicare only covers about 60 percent, according to the Employee Benefit Research Institute (EBRI). The rest comes out of your wallet, and it’s more than you might think.
Get ready for sticker shock: According to a 2013 study by Fidelity Investments, a 65-year-old couple who retired last year will on average shell out $220,000 on health care throughout retirement. In an EBRI study last year, a 65-year-old single man would need $122,000 in savings and a single woman $139,000 (women need more to cover longer life expectancies) in order to have a 90 percent chance of covering their retirement medical expenses.
The average retiree spends more on medical services than food.
These out-of-pocket estimates include Medicare’s deductibles and co-payments as well as premiums for optional extra coverage, out-of-pocket expenses for medications, and assorted other costs that Medicare doesn’t cover, such as hearing aids and eyeglasses.
They do not factor in long-term care. And anyone retiring before age 65, when Medicare kicks in, will be facing additional costs.
If you find the sum surprising, you’re not alone. Another Fidelity study found that nearly half of working people ages 55 to 64 believe they’ll need only $50,000 for medical expenses in retirement.
Back when our parents retired, many were able to rely on health insurance through former employers. Now only about a quarter of larger firms offer postretirement plans, and they may differ dramatically — in deductibles, co-pays and shared premiums — from those available before retirement.
While it’s crucial to save for medical expenses, there’s only so much you can do to keep them down. But at Sterling Retirement Resources, we help clients assess their potential needs — weighing factors such as current medical spending, the quality of the current plan, health and family history — and then look for ways to stretch their medical dollars.
Here are a few good steps to take:
• Get out your crystal ball. The $220,000 figure is a broad statistical average. To more precisely predict your own expenditures, you’ll need to adjust upward or downward depending on your health, lifestyle and family history.
Online tools can help. The Social Security Administration offers a simple calculator that shows how many more years you’re likely to live based on your gender and current age. The AARP’s more detailed calculator takes information such as your health history and where you live to estimate how much you’ll need to save. (You may want to be sitting down when you click it.)
• Stay on the job, if you can. If you have to purchase private health insurance before you’re eligible for Medicare at 65, the premiums and deductibles can eat heavily into your savings. Try to obtain interim coverage through a COBRA policy, your spouse’s employer, a professional organization or part-time work. Some companies let employees nearing retirement “phase out” gradually.
• See if you qualify for a health savings account (HSA). If your health plan is considered high-deductible under the IRS definition, you can contribute to an HSA in pre-tax dollars. Earnings accumulate tax-free as long as the money is used for qualifying medical care. You can open the account while still working, and the savings roll over from year to year (unlike contributions to a flexible spending account), moving with you when you leave your job.
• Purchase a Medigap policy. Medigap is supplemental insurance sold by private insurance companies that can help pay for some of the expenses not covered by Medicare. At Sterling, we recommend Medigap to all of our clients. Then we shop the market, compare options and work with a specialist to find a policy that meets each person’s insurance goals.
• Compare health care costs by state. If you’re thinking of relocating after retirement, investigate the cost of health care in the new place. According to Kaiser, health insurance is most expensive in Colorado mountain resort areas, parts of Georgia, rural Nevada and far western Wisconsin.
• Maintain healthy habits. Exercise can’t guarantee good health, but it can reduce the risk and impact of diseases such as diabetes, heart disease and some cancers. No need to sign up for a marathon; experts at the Mayo Clinic recommend 150 minutes a week of moderate aerobic exercise – five brisk half-hour walks.
We know it’s not exactly pleasant, trying to calculate how much sand you have left in the hourglass, imagining what diseases might hover on your horizon, picturing yourself writing checks for hundreds of thousands of dollars in doctor’s bills. But someday, as you kick back on the deck of that cruise ship or lakeside cabin — or maybe just take another bike ride around the neighborhood — you’ll breathe easier knowing your health care will be covered when you need it.
Steven C. Finkelstein is president and a certified financial planner, practitioner; and Megan E. Gehrman is a certified financial planner, practitioner at Sterling Retirement Resources.
For a complimentary consultation, contact Finkelstein at 763-762-3400 or: firstname.lastname@example.org, or visit: www.sterlingretirement.com.
Securities and advisory services offered through Cetera Advisor Networks LLC Member FINRA/SIPC. Cetera is under separate ownership from any other named entity.