Retirement Financial Planning and Out-of-Pocket Medical Expenses

Brand new research demonstrates that medical care might cost seniors greater than $200,000 in the course of their retirement years - even with Medicare coverage. Can you afford that much?  If not, perhaps sound retirement financial planning can bridge the gap.

Even with coverage from Medicare (which might be shrinking in years ahead to balance the shortfall in the federal budget), Fidelity Consulting (a department of Fidelity Investments) projects that a married couple that retires at age sixty five will need about $200,000 to cover 20 years of out-of-pocket health care expenses-excluding the cost of over-the-counter medicines, dental care services or even long-term care. That is more than 5% percent greater than last year's $190,000 figure, an increase that Fidelity states is because of health care costs increasing 5.8% a year since it started its study in 2002. It is likely that a lot of retirement financial plans do not calculate retirement needs for medical expenditures effectively. That`s why you must think about comprehensive retirement financial planning.

The forecast for health-care costs considers that retired people do not have employer-sponsored retiree health care, but includes (1) costs related with Medicare Component B and Part D premiums, (2) Medicare cost-sharing provisions (such as co-payments, coinsurance, deductibles, and excluded advantages), and (3) out-of-pocket expenses for prescription drugs. Note that you should not rest on the fact that your current job or past job covers heath care in retirement.  That could always end pushing the burden to you.  Therefore, your retirement financial planning should account for these costs even if they appear to be covered today.

Fidelity's forecast of costs actually might be small, based on data from the Employee Benefit Research Institute (EBRI). It states Fidelity's research didn't take into account future life expectancy, and estimates that a 65-year-old couple who retires without employer-sponsored medical insurance will require $216,000 if they live to age 80, $444,000 if they live to age 90 and $778,000 if they live to age one hundred.These costs rise significantly with age as ill health climbs rapidly as we age, For example, did you know that 49% of those 85 and over have Alzheimer's?

'Medicare covers only 51 percent of costs connected with medical care services,' write EBRI in an issue brief. 'Individuals are in large part the cause for covering the other forty-nine percent. Meanwhile, Medicare faces financial distress in 2018 and it's likely that gains will probably be decreased in the long term. Hence, if Medicare benefits are decreased, a couple age 65 these days might require significantly more than $300,000 for medical care expenses in retirement.'² How can one possibly calculate retirement financial planning needs for health care when the costs are increasing and we are all living longer?

The above mentioned figures might appears like a large amount of cash, but whenever you take the effect of interest compounding into consideration, it might be simpler than you think to save enough. For illustrative purposes, let's use Fidelity's presumption that a couple would need $200,000 to cover 20 years of medical expenses in retirement. That's $10,000 a year. In the event you can afford to put $158,000 into a 'medical expense' account upon retirement (i.e. allocate $150,000 of your retirement nest egg), you can get your needs met.  Even at today's low interest rates, a 20-year fixed term immediate annuity will provide such guaranteed payments.  Alternatively, if confident in your investing acumen, invest $150,000 at 8% to generate your needs and you'd end up with $718,465. The table below demonstrates.

Growth of $150,000 with $10,000-per-year withdrawals

The idea is this. Retirement financial planning needs not only for general expenses but pragmatically for the health costs above. And remember that the costs mentioned in the above research do not incorporate the expenses of long-term care which we address in a separate post.

1 Fidelity Consulting, as of July 2006. Assumes no employer-provided retired person health coverage and life expectancies of 17 years for a male and 20 years for a female.

2 Sources: EBRI, as of March 2006 ).

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