It is no secret that health care is expensive. For most of us, annual health-care costs increase as we get older and threaten to become our largest expense item. Fidelity's latest study proclaims that the average 65-year-old will need $245,000 to cover health-care costs in their lifetime. Let's explore what the real costs might be and some ways to deal with them.
The costs included are insurance (Medicare Part B, D, supplemental and dental) and out of pocket (deductibles and copays for hospitals, doctors, tests, prescriptions, hearing, visions and dental). They do not include potential long-term care expenses.
HealthView Services estimates for a 65-year-old woman without medical issues, this can range from more than $5,200 to over $9,550 per year in today's dollars. This can easily double if there are health issues and considering the effect of inflation. Health-care cost inflation has consistently been about double the CPI for the last 20 years and shows no signs of abating.
Fidelity and others typically use average expected lifetimes for their studies. This means that 50 percent of individuals will live longer. When planning for retirement, it is important to look at potentially longer lifetimes and your circumstances. If you live longer, you will probably spend more on health care given higher inflation costs. If you are in good health, you will likely live longer, have a better quality of life and pay more in total. If you are in poor health, you will probably pay less overall. If you want more information, check out HealthView's detailed study at http://bit.
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Your income also drives your expected costs. Higher income can trigger Medicare surcharges. For the highest income bracket, the surcharge for Part B & D is currently 2.8 times the base $121.80 for each person per month.
What can you do to manage your health-care costs?
Quality of life matters. Improve your physical and mental fitness and you will enjoy your retirement more. Make sure you are getting moderate exercise and watching what you eat. Keep yourself socially active. It doesn't matter what your age, starting to make improvements here will pay benefits.
If you are covered by Medicare or other insurance programs, pay attention to your benefit choices. Review your company plan, supplemental policy and Part D coverage annually to make sure they match your needs. There are low-cost services available through senior centers, AARP or your insurance provider to help you make the most of your premiums.
Save. If you are still saving for retirement, make sure you are accounting for health-care costs and the higher rate of inflation in your plan. Identify the savings needed to cover these costs and fund them. If you qualify, Health Savings Accounts are a great place to start, as your contribution, growth and medical expenses paid are tax sheltered.
For many retirees, health care is expected to take up 90 percent of your Social Security benefit later in retirement. If you are counting on Social Security to pay a majority of your living expenses, you need to have other income sources to cover other expenses.
Depending on your situation, this may come from separate savings, creating a guaranteed income stream, utilizing the equity in your home or other assets. Start planning now so you can maximize your income when it is needed. If you don't feel comfortable doing this on your own, seek out a financial planner who is well-versed in these areas.
Long-term care expenses are not included in these estimates. While not everyone may experience LTC expenses, the statistics say the majority of us will have these expenses. The most likely to need help with LTC are women in good health. They also may end up caring for a spouse or partner, so they need to consider how others will avoid being a burden. Insurance and saving are two components of planning for LTC expenses. The key is to start early.
Health care in retirement can be very expensive and use up a large portion of your income. Making sure you have an enjoyable retirement and can cover these expenses requires doing some planning. Waiting until a health crisis occurs is not wise. Paying attention to your body, exercising your mind and body, eating properly and participating in preventive measures will help your personal health. Likewise, paying attention to your financial health and planning ahead will help you deal with higher costs as they occur.
Tom Roberts, president and financial planner at A New Approach Financial Planning in Lakewood Ranch, can be reached at 941-927-9590 or Tom@ANewApproachFP.com.