When planning for retirement, one aspect that is often overlooked or underestimated by individuals is golden-year healthcare costs. Today, people are living longer. And, the older they get, the higher the risk becomes that their health will deteriorate, which results in higher healthcare costs for them, over time.
A recent study conducted by Fidelity Benefits Consulting, estimates that a 65-year-old couple who retired in 2014 needed an average of $220,000 to cover medical expenses throughout retirement. However, the estimate assumes that the individuals do not have employer-provided retiree healthcare coverage and takes into account Medicare costs – such as deductibles and coinsurance – but does not include other expenses such as dental, over-the-counter medications and long-term care.
“There are a lot of individuals who do not take into consideration the cost of their healthcare, come retirement, generally at the age of 65,” says Chris Lester, president of Somerset-based Professional Planning Services, Inc. “Most people do not want to talk about it, aren’t concerned about planning for it, or think that employer-sponsored plans and Medicare will fully take care of their needs come that time.”
According to a Merrill Lynch and Age Wave retirement study, “Less than one out of six pre-retirees have attempted to estimate how much money they might need for healthcare and long-term care in retirement.”
Additionally, the study notes that the greatest retirement worry among individuals over the age of 50, is that they will not be able to afford healthcare and long-term care expenses.
In this article, New Jersey Business explores some ways individuals can save and invest for their long-term healthcare needs.
When it comes to employer-provided healthcare plans that carry over to retirement, the percentage of large employers offering it over the past two decades has declined dramatically. And, if an employer currently offers a retiree healthcare plan, it is not required to provide it 10, 20 or 30 years down the line, unless otherwise promised. So, it is best for employees “to plan accordingly and look into various other options when it comes to their post-retirement health needs,” says Michael Petrone, a certified financial planner at Princeton-based Petrone Associates.
Besides savings plans like 401(k)s, pensions and IRAs, etc., health savings accounts (HSAs) can be an excellent vehicle when saving for individual healthcare needs. HSAs are similar to personal savings accounts, but come with special tax-advantages and are used in conjunction with a high-deductible health plan. HSAs are offered by some employers and typically work like a 401(k), where a contribution is taken from an individual’s paycheck on a pretax basis. The maximum annual contributions are $3,350 for individual coverage and $6,650 for family coverage in 2015. An extra $1,000 in “catch-up” contributions can be made for individuals over the age of 55. However, funds of a HSA are not subject to income tax at time of deposit and can be rolled over year-to-year if not spent. HSA funds can be used for any current or future healthcare needs.
According to a recent report by the Employee Benefit Research Institute, an individual contributing to an HSA for 40 years can save between $360,000 to $1.1 million, depending on the rate of return and if no withdrawals are made.
When individuals reach age 65, Medicare coverage begins. However, Medicare only covers approximately half the cost of healthcare needs, so individuals would “need supplemental insurance to cover remaining costs or pay out-of-pocket, especially if they do not have insurance provided to them by an employer at retirement,” says William Isele of law firm Archer & Greiner, P.C., Princeton.
“There are a lot of people that say, ‘I’m 65 and I’ve got Medicare, so that will take care of me,’” Isele says. “Well yes, it will take care of them to a certain degree, but it won’t pay anything for a nursing home, except under very limited circumstances. … And Medicare does not cover long-term care.”
“Long-term care insurance is a good idea, especially if people do not want to spend up all of their savings or use assets, like one’s home, to help pay for a nursing home or assisted living facility,” Professional Planning Services’ Lester says.
Today, a nursing home “can cost $10,000 a month in New Jersey,” Isele adds. “So paying for long-term care insurance should be taken into consideration especially if an individual has a family history of illnesses like Alzheimer’s or dementia.
He says that the only problem with long-term care insurance is that “fewer insurance companies are offering it today … it is increasingly expensive and the options are more limited. The reality is that insurance companies are in business to make money. It is very difficult to insure against life expectancy and with people living longer today, it just increases the cost.”
The options mentioned are only a few choices available when planning for golden-year healthcare, and individuals should reach out to their advisors today, to discuss the best way to take care of healthcare needs for tomorrow.
“It is important to deal with it and plan for it in order try to mitigate the financial risk,” Petrone advises. “Healthcare after retirement can wind up being a $1-million expense, and can devastate families financially.”
“People should continue to do what they have been doing for generations and put money aside for old age,” Isele concludes. “That really is the best way. It basically comes down to self-insuring. If people don’t need the money for care and if they live a long and healthy life, that’s great. But it’s always good to plan.”