Featured on CNBC: Careful Planning Can Ease Retirement's Health Costs
January 23, 2015
The potential health-care costs during retirement can seem pretty daunting, but don't despair.
According to a Fidelity Investments study, a 65-year-old couple in 2014 would have needed $220,000 to cover health-care costs during the course of their retirement, not including skilled nursing care.
The average cost for nursing-home care is about $81,000 per year, with an average nursing home stay of 2.6 years for a typical female elderly patient and 2.3 years for a male, according to a report from the American Council of Life Insurers.
Unlike long-term-care insurance, medical insurance expenses during retirement are a relatively straightforward calculation consisting of three main elements (not covered by the free Medicare Part A):
Premiums for Medicare Part B
Medicare supplement premiums or, if not purchased, Medicare co-pays
Medicare Part D (prescription drug coverage) premiums and co-pays
"People don't normally have a concept of these costs, unless if they've experienced a parent who needed care," said Shane Yonston, a CFP and founder and principal advisor of Impact Investors.
Spread out over about 20 years, it isn't that much money, according to Simon of Personal Business Management Services.
"They may currently be paying a similar amount, and some will have better coverage [under Medicare] than they have now," she said.
The pre-Medicare retirement years can be trickier.
"The advent of the Affordable Care Act adds some complexity to planning for those under 65," Impact Investors' Yonston said. "In navigating for insurance planning, we need to be aware of how investment income will impact a client's eligibility for premium subsidies."
Health-care planning should be more than financial, said J. Michael Salley, wealth manager and president and chief executive of Salley Wealth Advisors Group.
"Financial advisors should talk to clients about wellness initiatives, counsel them and make sure they have access to a wellness program," he said.
"Look to the local Y's, churches [and] local clinics," Salley added. "Clients want to know that you care."
The other conversation
The other big conversation is LTC insurance.
"It's a tough one for people to stomach," said Yonston at Impact Investors. "It's expensive, and they may never use it."
"But if you don't have it, your spouse and children will have to worry about it," he said.
What is the financial risk of not getting LTC insurance?
Factors related to health-care costs in retirement
Age at retirement
Length of life after retirement
Availability and source of health insurance coverage after retirement to supplement Medicare, once available
Out-of-pocket expenses (i.e., prescription drug co-pays)
Rate at which health-care costs increase
Interest rates and other rates of return on investments
Source: National Retirement Planning Coalition
Yonston provides some hypothetical numbers for a 60-year-old Californian planning ahead for assisted living.
If the cost is now $225 per day, with 6 percent inflation it will be $721 per day in 20 years. A two-year stay would cost $520,000. "And that's using today's dollars... because of inflation, if we use future dollars, clients who wish to self-insure would need at least $3 million," Yonston said.
There are many other considerations beyond the financial, said Salley at Salley Wealth Advisors Group. He said he asks his clients to think about: