Hidden Retirement Risks: How to Plan Now for Higher Health Costs Later

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Many people try their best to plan and prepare for retirement. They regularly save and start to anticipate what their budget will look like. However, many overlook one of the biggest risks a retirement account faces: potential healthcare costs. Overlooking or underestimating these potential expenses can pose a serious threat to your savings – one large medical bill could quickly whittle away at the money you may need for another 10 to 20 years. The best way to avoid this? Start preparing now. Here’s what you need to know about planning for retirement healthcare costs.

Why You Should Plan

Unexpected medical expenses can quickly put a huge dent in your retirement savings. Even if you’re budgeting for health costs, you’re probably still underestimating how much you should be saving. “As we age and live longer, our health deteriorates pretty heavily in the last five to seven years of life, and that’s when we spend a ton of money,” said Bob FitzSimmons, a certified financial planner and president of Bob FitzSimmons Inc., a wealth management firm, to CNBC. “I have quite a few clients who have burned through their capital in assisted-living facilities, spending $200,000 to $300,000.”

In an AARP study, the organization found that two-thirds of survey respondents had never even attempted to determine how much healthcare will cost in retirement. Additionally, when asked to give a ballpark estimate of how much money they might need, more than 40 percent said they expected to need less than $100,000 to cover their retirement health costs.

However, an average 65-year-old couple should actually have about $220,000 set aside for 20 years in retirement, according to the AARP. Many don’t have that much saved and don’t feel as though they’ll be able to afford health costs. Just over half — 52 percent – of adults ages 50 to 64 said they feel confident they can afford the cost of healthcare in retirement. Another mistake is assuming you don’t need to save much because you have Medicare. Unfortunately, Medicare only covers about 51 percent of your healthcare costs, per the AARP.

In some cases, retirees should anticipate spending even more than $220,000. For example, CNBC reports that a 65-year-old couple with median prescription drug expenses will need $295,000 for a 75 percent chance of being able to pay all their remaining lifetime medical bills. In order to increase that to a 90 percent chance, the couple should have $360,000 saved up. While that may seem like an overwhelming amount of money, there are things you can do to start preparing now.

1. Stay healthy

It may seem obvious, but it’s the best way to avoid spending all of your money on medical costs. Prudential writes that healthy habits, such as good nutrition and exercise, should start early and be maintained throughout your life. While there’s never a 100 percent guarantee you won’t get sick, it certainly helps.

You should also determine possible conditions you may develop later in life so you can start budgeting and planning accordingly. U.S. News & World Report writes that the most chronic ailments in retirement are asthma, cancer, heart disease, stroke, and diabetes. Talk to your doctor about your chances of developing any of these, as well as any possible preventative measures.

You should also examine your family history. “If you recognize that something runs in your family, you know what your options are and what you can do to delay the onset,” Elaine Bedel, a certified financial planner, told U.S. News & World Report.

Another great way to ensure you’re at your healthiest is by taking advantage of wellness benefits that may be offered at your workplace. More and more employer-subsidized programs are being offered, which are designed to either help you break bad habits, such as smoking or overeating, or establish good ones, such as onsite exercise classes and nutrition counseling.

2. Educate yourself

Start by talking to people who are in retirement and learn about their experiences with healthcare costs. A key question to ask is whether they feel they were prepared enough to handle their health costs. Fox Business also recommends doing your own research online so you can begin to understand the true costs of healthcare.

Working with your financial planner to build a plan that’s based around “what ifs” is another great way to prepare. You can start to apply some of the information you’ve gathered, such as possible diseases, and begin to work those into your healthcare budget.

3. Determine your healthcare cost estimate

Use the knowledge you’ve gathered about average healthcare costs and then factor in your health and potential lifestyle needs. To arrive at your most accurate figure, Fidelity Investments suggests adjusting the $220,000 based on your family history and health status — this could cause you to plan for a longer or shorter retirement, as well as a larger or smaller total cost.

4. Look into all possible funding options

Fidelity writes that if you have a health savings account that is used in conjunction with a high-deductible health plan, you will be able to make pre-tax contributions, which can be used to pay for qualified medical expenses. The funds can be used to pay for both current and future qualified medical expenses, meaning it can be set aside to cover future retirement expenses.

“Health savings accounts are a smart way to set aside funds specifically for medical needs,” Steven Feinschreiber, senior vice president of financial solutions at Strategic Advisers Inc., said to Fidelity. “HSAs are not subject to the ‘use it or lose it’ rule and are completely portable for individuals who change employers.”

Working part time is another option worth considering. Check if your company offers health insurance benefits to its part-time employees. If so, it could help cover a substantial amount of your healthcare costs while allowing you to enjoy semi-retirement. In fact, this is a reason many retirees decide to work part time.

According to a 2014 EBRI Retirement Confidence Survey, 50 percent of retirees said keeping health insurance or other benefits played a major role in their decision to continue working.

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