Health care costs for retirees are a major expense, and one that most clients nearing retirement dramatically underestimate. A recent retirement study from Merrill Lynch indicates that only fifteen percent of pre-retirees have even attempted to quantify these costs.
According to a 2014 survey from Employee Benefit Research Institute, a non-profit and non-partisan research institution, married couples covered under Medicare that have median drug expenses and wish to have a seventy five percent chance of covering their health care expenses need to budget $199,000. A ninety percent chance of success would require $241,000. Prescription drugs are a major culprit and the same couple with drug costs in the ninetieth percentile would need to budget $326,000 to have that same ninety percent chance of meeting their retiree health care costs.
Medicare currently covers about sixty two percent of health care expenses for those age sixty five and older, while out-of pocket expenses account for approximately thirteen percent and private insurance about fifteen percent. The remainder comes from various government sources. Medicare was never intended to fully cover retiree health care costs, deductibles and co-payments were included when the program was established in 1965.
Retirees clearly have a steep hurdle if they wish to cover anticipated health care expenses in full. While there is no easy fix there are some things that those nearing retirement should consider.
Health Savings Accounts are one way for clients to allocate funds on a tax advantaged basis for future health care expenses. In conjunction with a high deductible health plan, workers can save money to cover medical expenses and roll any unused portion forward to future years.
When you retire can also have a big impact on cost. According to Fidelity Investments, couples that retire at age sixty two- instead of sixty five- can anticipate an additional $17,000 per year in health care expenses for the three year period prior to obtaining Medicare eligibility. If that same couple defers retirement to age sixty seven they may realize an estimated $10,000 annual savings for those two years of deferral. The combined cost savings could have a material impact on your retirement income plan.
The age old advice of maintaining good health through a combination of diet, exercise, proper rest and preventative physical and mental wellness may be the best way for many to bend the cost curve. Drug costs, as evidenced above, add dramatically to the total cost of retiree health care.
Planning for certain health events may be beyond our control, but having an awareness of the potential costs can help keep your retirement on track.
John Male, CFP®
The Gassman Financial Group
G&G Planning Concepts, Inc.
9 East 40th Street, Suite 1500
New York, NY 10016