Rebekah Barsch is executive officer and vice president of Planning and Sales at Northwestern Mutual.
What’s the biggest risk to your financial security in retirement? Whenever I ask that question, what I hear most often is that people are concerned about whether or not their money will last. Many pre-retirees don’t budget for unexpected medical expenses that can pose a threat to their retirement income plan.
The Employee Benefit Research Institute estimates that a 65-year-old couple retiring today with median prescription drug expenses needs $151,000 (in today’s dollars) to have a 50 percent chance of meeting their health care costs in retirement, not including long-term care costs. A couple with $255,000 in savings would have a 90 percent chance of covering those costs.
Why the Disconnect?
In my experience, many pre-retirees mistakenly believe that Medicare, the federal health insurance program for those aged 65 and older, will cover the vast majority of their health care expenses in retirement. Not so.
In reality, Medicare doesn’t cover many of the health care expenses older Americans use most. I’m talking about vision and dental care, hearing aids and eyeglasses. And Medicare Part D plans vary widely when it comes to prescription coverage. I remember feeling sticker shock when I helped my mom and stepdad pay their monthly pharmacy bill. Millions of Americans take blood pressure, diabetes, arthritis and other commonly prescribed medications to stay healthy and out of the hospital. These aren’t health care costs you can dial back on to save money.
Perhaps more significantly, Medicare pays only for a limited amount of supportive care services. It covers up to 100 days of care in a nursing home (skilled nursing facility) only after you have spent three days in the hospital and as long as you need skilled nursing care. In some cases, Medicare will cover home health care, but eligibility requirements are strict, and Medicare typically approves coverage of only a limited number of hours per week.
As I learned in my own family, those distinctions can be costly. When my stepdad fell and broke his arm, he needed rehabilitation after his hospital stay. Medicare covered a good chunk of his nursing home bill. However, when my mother’s Parkinson’s disease progressed and she required care, Medicare would not even consider covering her nursing home expenses since she did not have a qualifying hospital stay.
A Potential Drain on Your Retirement Income
Many people also assume that Medicare is free. Part A is; the government provides Medicare hospital insurance at no charge once you reach age 65, assuming you or your spouse paid Medicare taxes during your working years. But you’ll pay a premium for Medicare Part B (medical insurance for doctors’ services, physical therapy, outpatient hospital care and other services), a premium for Part D (prescription drug coverage) and a premium for any supplemental coverage you may choose to get.
Even without the threat of serious illness, premiums, deductibles, co-pays and out-of-pocket health care costs are likely to take a significant bite out of your retirement income. And when you also consider that health care costs are rising faster than the rate of inflation, it’s not surprising that health care costs can quickly become the largest single drain on your retirement income, especially later in retirement when you’re likely to consume more medical services.
This is why I encourage you to ask yourself the following questions: How prepared am I for the potential health care costs that could impact my retirement savings and income? How will I pay for health care if I live 30 or 40 years or even longer in retirement? And what impact will those expenditures have on the legacy I hope to leave to my children and grandchildren?
The best way to manage and protect your retirement income is to plan ahead. That means having a realistic picture of what health care is likely to cost you in the future and incorporating that into your overall retirement plan.
Why Expert Help Makes a Difference
This is where a financial professional can help. And by financial professional, I mean more than someone who simply buys and sells investments. You want an experienced professional with the retirement income planning experience necessary to help you estimate your potential health care costs and help you plan for them. This includes finding the best way to supplement Medicare as well as protecting your wealth against other retirement risks—such as long-term care expenses—in the future.
