Healthcare Planning for Retirement
A decade or so ago, there wasn’t a lot of discussion about how healthcare costs could ruin a perfectly good retirement planning strategy. What has changed is the massive numbers of Baby Boomers headed for the retirement exits along with steeply rising healthcare costs. In today’s world, projected healthcare costs during retirement deserves to be a line item in your planning…and a big item of focus.
Healthcare costs have risen sharply over the years, in part due to advances in medicine. As a result, those eighty million Baby Boomers are living longer which adds financial pressure on virtually all financial systems including estimates that out-of-pocket costs for healthcare could exceed $250,000 during your retirement years. What are the best ways to fund this enormous expense item?
- Play the statistics and self-fund. If you have minimal assets and income, you’ll quickly qualify for Medicaid which will fund 100% of nursing care costs. If you have assets, ‘playing the statistics’ means calculating your potential out-of-pocket costs based on the average nursing home stay should you be unlucky enough to end up there. Based on research by Boston College’s Center for Retirement Research, there is only a 27% chance that a man age sixty-five will need nursing home care. If he does, the average stay is only ten months. Assuming $200 per day costs, you’d only need about $60,000. For a woman age sixty-five, the odds of ending up in a nursing home are 44% with the average stay being sixteen months. Convert that to dollars and total costs would be about $100,000. Of course, here you’re playing the averages…meaning half of the people stay longer and half shorter. My own experience dealing with real cases is that most people opt to ‘stay at home’ versus going into a nursing home and this would likely cause costs to rise, perhaps sharply.
- Fund expected costs with insurance. Traditionally many people have chosen to buy long-term care insurance as a way to fully or partially fund future in-home or nursing care. The problem that I’ve seen is that the insurance companies significantly underestimated their future expense obligations and experienced heavy losses. Many got out of the business while others have significantly raised premiums on their policyholders. My own personal experience is that my carrier, Met Life, has raised premiums some 58% and has indicated they plan to continue raising premiums as state-by-state insurance commissioners will allow. Premiums could become unaffordable.
- Use new hybrid insurance products. In response to the fallout in the traditional long-term care insurance industry, insurance companies have developed new products that combine some element of a life insurance policy (often with a large lump-sum, up-front deposit) with a long-term care benefit. There are a number of variations but generally if you never tap the policy for long-term care benefits, your beneficiaries receive life insurance death benefits.
The rising costs of healthcare presents a complex financial puzzle for retirees or those people planning their retirement. I strongly recommend that you meet with your financial professional for assistance in navigating this financial minefield.
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