Big numbers have a way of getting our attention, especially when those big numbers are intended to scare us. One of the “big numbers” that often scares retirees is the projected cost of medical care: usually it’s presented as a huge lump-sum dollar amount, as in, “The average retired couple will need at least $280,000 to cover medical costs during their lifetimes.” But are those big lump sums representative of the real world? Could it be that retirees are thinking about the true cost of health care in an unrealistic way?
Your True Cost of Health Care Will Not Be a Lump Sum
That’s the premise of this helpful and refreshing article just published on NerdWallet. “Let’s Get Real About Health Costs in Retirement,” says the title of the piece, written by well-known financial columnist Liz Weston. “What you pay for health care in retirement may be more predictable, and less scary, than you think.” Weston, along with several of the sources she quotes, takes issue with the “lump sum” approach to projecting the true cost of health care, because, her article implies, it’s misleading. “You won’t pay for health care in retirement with one lump sum,” she writes. Nevertheless, “That’s the way these expenses are often presented, though, and the amounts are terrifying.” Estimates of total lifetime health care costs for an average retired couple range from $285,000 (not including nursing home or other long-term care) to as high as $400,000. “No wonder 45 percent of people in their 50s and early 60s have little or no confidence that they’ll be able to afford their retirement health care costs,” Weston observes.
Weston spoke with Jean Young, a senior researcher at Vanguard Center for Investor Research, who has long been bothered by the tactic of “presenting people with a huge, perhaps unattainable, figure” when estimating the true cost of health care. “The thing is, it’s not helpful, it’s not actionable, it’s not relatable,” Young says. As Weston points out, most other retirement expenses are not quoted as a lifetime lump sum the way health care often it. “You also may need six figures to cover food, or transportation, or shelter in a typical retirement,” Weston writes. “But these are costs you pay over time — just like you’ll pay for health care.”
Your True Cost of Health Care Will Probably Vary from Everyone Else’s
According to the NerdWallet article, researchers from Vanguard and Mercer Health and Benefits examined how much retired people actually spend on health care. They found that there are a handful of major determining factors that will drive each person’s true medical costs. These include:
- Where you live: some costs vary greatly by location.
- Your health: your state of health when you enter retirement is a good predictor of how much health care you’re likely to consume
- Your parents’ health: In some cases, genetic predisposition can have a big impact on your true cost of health care.
- Whether you buy supplemental coverage: premiums add costs but policies save money over time while controlling risks of runaway expenses.
- Your income: higher-income people can pay larger premiums for certain parts of Medicare.
So, is there a better way to predict how much the true cost of health care will actually be? Weston has an answer. “Here’s the number the researchers came up with: $5,200. That’s the median amount a typical 65-year-old woman could expect to spend annually for premiums and out-of-pocket medical, dental and vision costs in 2018.” Of course, researchers offer plenty of caveats and clarifications. They assume, for example, that the woman lives in a medium-cost area and is at what experts would consider “medium risk” for health care costs – in other words, she may be a smoker or have “a chronic medical condition or two.” The estimate is also based on this imaginary average woman purchasing Medigap Plan F, the most popular policy. The bottom line, Weston writes, is that “Eighty percent of those in similar situations would face costs in the range of $4,900 to $6,000.”
The estimate goes up from there in some worst-case scenarios. If her health deteriorates significantly, her costs could double. Also, if she decides to forego the Medigap policy and then has a prolonged health crisis, she could find herself paying out more than $20,000 per year.
Like Health Care, A Successful Retirement Requires a Plan
Of course, Weston reminds us, none of these calculations includes the costs of long-term care which she calls “the big wild card.” For one thing, predicting who will need nursing care, assisted living, or home health care, is a challenge: roughly half of all older people incur no long-term care costs, says the article, but that includes those receiving unpaid care at home from family members. About 25 percent of seniors will spend up to $100,0oo on care costs, while roughly one senior in seven will spend a quarter of a million dollars or more. The solution depends on one’s circumstances: wealthy people can self-fund; lower-income seniors will likely rely on Medicaid or VA benefits; and those in the middle will probably turn to long-term care insurance, a reverse mortgage, or some other funding sources. No matter how they pay for it, long-term care costs have the power to derail even the best-laid plans.
Sadly, in our view, the American health care system is staggeringly expensive, complex and inequitable. The take-away for all of us is to be prepared with a thorough and comprehensive plan to cover both short-term and long-term medical needs in retirement. We can assist you with that process through a strategy we call LifePlanning. But the real beauty of a LifePlan is that it is far more than a medical plan or a financial plan: a LifePlan takes those critical elements and weaves them together with a protective legal framework, a strategy to plan where and how you want to live, and a proactive approach to involving your family in your aging plans. It truly is a plan for the rest of your life.
We hope you’ll accept Rajiv Nagaich’s invitation to find out more at a future LifePlanning Seminar. These entertaining, informative events are held throughout the area, and attendance is absolutely free. Bring your spouse, your parents, your adult children, and get your retirement questions answered. For dates, times and locations, visit our Live Events page and register for the event of your choice. Be prepared for whatever retirement living throws your way, with a LifePlan from AgingOptions. And age on!
(originally reported at www.nerdwallet.com)