Retirement Health Care Costs

For a while, I’ve been writing about retirement and retirement health care issues and sharing the posts with friends and family.  A few of the recipients have encouraged me to broaden the distribution with the goal of raising awareness of the importance of planning for retirement health care costs and some of the steps advisors and individuals need to think about when it comes to these issue.                           

The posts will draw upon our research, personal experiences and feedback/questions I receive.   I plan on highlighting a specific issue or strategies that can make a difference to people’s retirement.   I hope the information in these columns will help families take greater charge of their financial futures and avoid what my parents and I had to endure… 

As my parents began to age, I admittedly spent little time contemplating how they were going to care of themselves. My father, the major breadwinner of the family, spent thirty years at Raytheon, while my mother worked part-time as a seamstress.  When he retired at 65, they owned the family home, had zero debt, earned full Social Security benefits, collected a pension, signed up for Medicare (which covered more than today’s program), and enjoyed a high-end supplemental (Medigap) insurance policy, which Raytheon generously paid for.  By all accounts, their years of toil were going to pay off in the form of a relaxed and financially secure retirement.

Until they got sick.

We always thought my father just liked to ignore us, but his $2,000 hearing aid revealed otherwise.  When my mother’s kidneys began to fail, there were twice-weekly ambulance trips for her dialysis treatment, not to mention $200-per-visit quarterly teeth cleanings recommended by their dentist, and the list went on.   Once manageable out-of-pocket healthcare costs skyrocketed.  We, like so many millions of others, had been lulled into a false sense of security that Medicare would pick up where Raytheon left off, but as the bills piled up, I began to realize that their golden years were in jeopardy.

Fortunately, I had the means to help take care of them, but as I began to reflect upon their predicament, nagging questions surfaced. If a financially stable couple with a seemingly comprehensive plan couldn’t afford quality healthcare when they retired, who could?  Why weren’t more services covered? How could retirees possibly wade through the complexities of doctor bills, insurance, and coverage gaps?

I also looked back on my career in financial services and realized that the very professionals who could have helped defray these costs were simply unaware that this problem existed.

Thus, the creation of HealthView Services.

I started the company with one objective: to motivate the financial services industry to integrate healthcare costs into the retirement planning process. Over the next twenty years, 78 million Baby Boomers retiring at an average of 10,000 per day are going to be entering the Medicare system, which will likely result in decreased services, increased premiums, or both.
And here’s a key point.  Many Americans believe that Medicare will cover most of their health care costs in retirement, few understand that today it only covers around 50% of health care costs.  Although health care will be one of the biggest expenses in retirement, most retirement plans do not factor in these expected costs. 

Here’s another very important point… health care inflation is driving costs higher. The most recent data from the Office of the Actuary shows that after a mild slowdown during the financial crisis, health care inflation is expected to be around 6% for the next decade. Why is that important? Costs are rising higher at a time when Social Security cost of living adjustments remain below 2%. So retirees will be facing a growing cost burden. When you project these costs out 10 years or more into the future, retirement health care costs are clearly on a path to exceed Social Security benefits.

Now that’s the bad news. The good news is that if you start planning for these costs early, the amount required to cost these costs does not have to break the bank. More about that in a future post.

Health care must be factored into every retirement budget and plan. Not only because of the cost, but also because of its inter-relationship with other aspects of planning.

Nothing underscores this point better than Medicare surcharges. You would think that simply saving more to increase income in retirement would be the smartest thing to do. And that’s what the retirement industry has to a greater of lesser extent focused on. But here’s the problem, generating more income in retirement may lead you to cross Medicare surcharge thresholds. Crossing a threshold may increase Medicare costs by 35% to 200%. One dollar extra income, can mean a big reduction in disposable income in retirement. In fact, the more you save, the more Medicare will cost you.

The good news is there are ways to reduce Medicare surcharges by selecting products that don’t count toward the measure used to calculate these surcharges. We just issued a HealthView Insights White Paper on this topic last week. It’s an important read, because it clearly demonstrates why it is essential that retirement plans factor in health care costs, of which Medicare is a significant component.

The paper also shows that these surcharges are not just an issue for the wealthy. They are an issue for middle class teachers and others who will receive pensions. Over time they will impact most Americans.

In future posts, I’ll talk in greater detail about some of the implications and unintended consequences of Medicare surcharges. So more to come. The bottom line is people can save tens of thousands of dollars in retirement, by optimizing retirement portfolios for income and health care costs.

I look forward to your feedback on this and future posts.  If you wish to be taken off this list, please let me know.