Notes on Health Care and Retirement
Published On: April 3, 2019
Written by: Ben Atwater and Matt Malick
On March 25th, we wrote you a piece called Notes on Retirement Planning in which we briefly discussed four important areas of focus regarding retirement planning – expenses, health care, income and risk tolerance. Today, we will dive deeper into the topic of health care and retirement.
Fidelity Investments estimates that a couple will spend about $280,000 on healthcare throughout their retirement. This does not include long-term care costs. This also assumes the couple will wait until 65, when they are eligible for Medicare, to retire. Obviously, this is a daunting sum, and might be a best-case scenario, especially if you live into your 90s.
The math behind this $280,000 is relatively straightforward. In today’s dollars, Medicare costs for a couple break down as follows: $1,608 in annual premiums for Part B, $547 in annual premiums for Part D, $1,459 in premiums for a Medigap policy and co-pays / deductibles amounting to $1,830 per year. This totals $10,888 for a couple in annual costs. If the couple retires at age 65 and lives until age 91, the $280,000 is equivalent to about 26 years of Medicare costs.
Remember this amount is in today’s dollars. Healthcare inflation has run substantially ahead of base inflation, the Consumer Price Index, over recent decades. MoneyGuidePro, our retirement planning software provider, expresses healthcare spending as a percentage in excess of the base inflation rate, or excess cost increase (ECI). For example, historical base inflation since 1970 has been 3.97%, and ECI is 2.80%, leaving overall medical inflation at 6.77%.
MoneyGuidePro notes that U.S. health care costs were 17.9% of GDP in 2016, and are projected to increase as a percentage of GDP. However, the Society of Actuaries and Milliman research projects this percentage to stabilize during the next 60 years at roughly 31.4% of GDP. Therefore, the excess cost increase should be higher for short-term projections and lower for long-term projections. In other words, believe it or not, it appears that healthcare inflation is decelerating, albeit very slowly.
Simply said, waiting until 65 (Medicare) to retire is a necessity for many. Private insurance ahead of Medicare can be cost-prohibitive. For example, MoneyGuidePro estimates that private insurance for a 60-year-old woman living in Pennsylvania will cost about $9,717 per year in premiums and another $3,958 in co-pays and deductibles for an annual total of $13,675. That’s a princely sum for those retiring before age 65.
Obviously, for many, one spouse can retire and the other can continue to work and add the non-working spouse to the working spouse’s employer-provided plan. This, however, isn’t a guarantee of a less expensive premium than we illustrate above. You must do your due diligence around employer-based plans before one spouse decides to retire and piggyback on the coverage of the other spouse.
We have worked with a few high net worth clients who have properly structured income to qualify for meaningful Obamacare subsidies before they qualify for Medicare. Subsidies completely phase out for couples whose income exceeds $83,120 and Obamacare subsidies are based on income, not assets. If you don’t have other income beyond interest and dividends, you could still have a sizeable taxable investment portfolio (not counting IRAs) and still qualify for subsidies. The calculation of income under Obamacare is highly complex and we must rely on tax professionals to verify them. However, for clients with investable assets; limited other income; where we can manage realized capital gains; and make IRA contributions, being high net worth and getting subsidies isn’t mutually exclusive. It’s hard to rely on this strategy though as Congress has been pushing to end Obamacare almost since it started.
The one area we haven’t addressed thus far is long-term care insurance. Planning for health care costs in retirement explodes for those few who require long-term skilled care, which can cost at least $100,000 annually (far more in many cases). For those who end-up in long-term skilled care for the duration, the average stay is 835 days, or 2.3 years, according to the National Care Planning Council. This in and of itself would be financially devastating for many.
Another reason to consider long-term care is for the benefit of your children and other family members. Fidelity research has found that 25% of baby boomers care for an aging parent. Having long-term care that covers in-home services can help ease the burden on loved ones.
The problem with long-term care insurance is that it’s prohibitively expensive. Many people can’t afford the premiums while also properly saving for retirement, paying for children’s education and maintaining their accustomed life style. If you are over 55, can afford the premiums, are healthy and long-term care is a concern of yours, it’s certainly advisable to evaluate a policy, especially if you have a family history of long-term skilled care stays (Alzheimer’s Disease, for example).
For clients with enough savings to cover the cost of extended skilled care, and for whom it’s important to leave an inheritance to heirs, then a life insurance policy can sometimes be used to simply replace the funds that were spent on long-term care. In many cases, this can be a more cost-effective solution than purchasing a long-term care policy.
Please don’t hesitate to reach out to us with any questions or concerns about healthcare in retirement. Remember, we are fee-only, independent financial advisors and we do not sell insurance policies, however, we can make introductions to trusted insurance advisors and sit with you to evaluate options.