The Hidden Costs of the Golden Years
If you’re getting ready to retire and think you are prepared, you might want to think again. Once you walk out your office door for the final time, you’re bidding farewell not only to workplace politics and long commutes, but also to free eyeglasses and tooth fillings, subsidized hearing aids and acupuncture and a host of other health-care benefits you may not even have realized were there.
In their place, you and your spouse are facing the likelihood of forking out about $225,000 between your 65th and 80th birthdays – on everything from prescription deductibles to Medicare premiums to stuff that Medicare just doesn’t cover.
The biggest issue is that people generally aren’t saving enough for retirement – and then there is this whole category of cost that they aren’t even considering because they figure Medicare will look after everything. No one is prepared for the magnitude of this expense, especially because it comes in bits and pieces throughout the years.
The harsh reality is that with each year that a retiree lives, health-care cost of one kind or another – doctor visits, specialist treatments, medications and so on – are likely to rise. That $225,000 tab for the next 15 years is up from $170,000 for a retiring couple just five years ago, according to an analysis by Fidelity Investments.
The question of how to cover those expenses is becoming more critical as more companies cut back or simply eliminate health-care coverage for their retirees. Only about 20% of companies with 500 or more employees now offer at least some health-care benefits to retirees who are eligible for Medicare, down from about 40% in 1993.
Some companies don’t extend this benefit to new employees; others raise the hurdles on their existing population of workers. Financial advisers agree that the problem of funding retirement health-care looms largest for those with less than $5 million or $6 million in retirement savings. Most concur that richer retirees will be able to cover the vast majority of their health-care needs through a combination of insurance products and out-of-pocket spending – and without throwing their whole retirement plans or life styles into chaos. That’s why you can’t wait until you retire to figure out how you will go about funding these expenses.
So what’s the best way to proceed? Assuming Fidelity’s numbers are right – and most planners agree they seem to be – a couple will need something on the order of $12,000 to $15,000 a year for health cost in the early years of retirement, and more in later years. If you want to cover that kind of expense by investing, you’d need to start with savings of about $215,000, assuming you can get 7% annual returns. In other words, you’ll want to include an amount like that when determining your optimal retirement portfolio. This amount of health savings is in addition to the amounts you need to fund normal retirement living expenses. So, if you could “FREEZE” the $215,000 health care retirement account, that is, if there were no inflation. Then you would need to set aside about $20,000 per year for the 10 years prior to retirement. (ouch!)
At the moment, there are few investment vehicles designed specifically for health care. But one that many advisors recommend is the Health Savings Account, or HSA. The HSA gives anyone a chance to set aside pre-tax income in a separate account to pay only for medical expenses. They can be established at any point, and dollars not used in any given year can be rolled over into the future – and ultimately into retirement.