How Do You Incorporate Health Care Costs into a Retirement Plan?
Navigating the intersection of healthcare and retirement planning can be complex, so we've gathered insights from top financial professionals. From integrating healthcare into a retirement strategy to including health costs in fixed-income modeling, explore the six comprehensive strategies provided by CEOs, Financial Planners, and Retirement Consultants.
- Integrate Healthcare into Retirement Strategy
- Estimate and Cover Future Health Expenses
- Model Pre- and Post-Medicare Costs
- Reflect on Health for Retirement Savings
- Anticipate Medicare and Uncovered Expenses
- Include Health Costs in Fixed Income Modeling
Integrate Healthcare into Retirement Strategy
You can't really have a solid retirement plan without accounting for healthcare costs. At our firm, we make sure to get granular—estimating future medical expenses, checking that insurance coverage fits their needs, looking at tax-advantaged Health Savings Accounts, the whole nine yards.
Then we integrate it all into their broader retirement strategy and income plan. And we stay on top of it with regular reviews as situations change over time. Proper healthcare planning gives our clients peace of mind that they can actually enjoy their retirement without getting derailed by mounting medical bills.
Estimate and Cover Future Health Expenses
Healthcare can be one of the most expensive parts of retirement. Proper planning begins well before retirement age. We begin by estimating potential healthcare expenses based on factors such as age, current health status, and anticipated medical needs. We work closely with clients to assess their healthcare coverage options, including Medicare, supplemental insurance, and long-term care insurance, to ensure adequate coverage and minimize out-of-pocket costs.
Additionally, we factor in inflation and potential increases in healthcare expenses over time to create a realistic budget that accounts for these costs throughout retirement. By proactively addressing healthcare costs in their retirement plan, clients can better prepare for future medical expenses and maintain financial security in retirement.
Model Pre- and Post-Medicare Costs
This is by far the biggest concern for those retiring before Medicare eligibility. When modeling retirement planning/income scenarios, we typically default to $1,000 per month for health insurance (per individual) before Medicare. After Medicare eligibility, we will change that number to $500 per month (with inflation) for the rest of their lives. Healthcare costs are something we feel strongly about incorporating within our clients' retirement planning/income scenarios simply because it's going to be one of the largest costs (if not the largest) they're going to incur in retirement. It has to be factored in, and there must be a plan for it.
Reflect on Health for Retirement Savings
Healthcare can become a significant expense in retirement, depending on whether you retire early, your Medicare eligibility, and overall health and wellness. It's important to reflect on your health and lifestyle choices when planning for retirement, as they can either extend or shorten your lifespan. Saving for health-related expenses in retirement is based on the individual's reflection on these items to determine if an HSA (Health Savings Account) would make sense.
Anticipate Medicare and Uncovered Expenses
Every retirement plan needs to anticipate healthcare expenses as part of their retirement. Beginning at age 65, individuals are eligible for Medicare, but that does not mean your health coverage is free. In fact, it's not uncommon for someone to spend over $400 per month between Medicare Part B, a supplement plan, and a drug care plan. If retiring before age 65, one should consider private health insurance to carry them to Medicare eligibility. This could add considerable costs to one's retirement plan.
Other medical expenses to anticipate throughout retirement are uncovered healthcare expenses like hearing aids, cosmetic or elective surgeries, many preventive care specialists, and most notably, long-term care. People often assume skilled long-term care is covered by medical insurance, and that could not be further from the truth. Planning in retirement to use savings or private long-term care insurance is often advisable.
Include Health Costs in Fixed Income Modeling
Future healthcare costs are always underestimated by those approaching and currently in retirement. To an extent, they should be a budgetary item and considered a "need." While also taking into account single/joint longevity, we include the potential costs in modeling the optimal amount of guaranteed, fixed income in a portfolio. Many times, utilizing an annuity helps to address this issue and reduces the pressure on the balance of the portfolio to perform, while concurrently decreasing sequence-of-return, market, interest rate, and longevity risks.
