Most people who talk about retirement planning are usually concerned about the “financials”. They talk about saving for it, investing for it, earning more for it, and guarding against the erosion of it so it will last on and on into the sunset of those golden years. And they are 100% right to do that, for sure. Without a strong financial base, retirement will be a struggle at best or a disaster at worst. Believe me when I say that the proper planning doesn’t just appear magically when you are actually retiring and needs to starts much earlier. So much earlier, in fact, that it should start when you begin your very first job because it’s that important. I say that to anyone who will listen, but very often if falls on deaf ears.
But, the fact that financials are so important doesn’t mean that there isn’t “something else” to be concerned about. I like to call it the Big “H” that you need to give plenty of thought to when it comes to your retirement years. What is it you ask? The twist is it’s about your healthcare, the Big H of your retirement years!
Your Age and Your Retirement
The idea of retiring is usually associated with being older, and that number is something in the age of about 62 (or higher). 62 is the time when you can actually start to draw from your Social Security benefits which allows you to have a steady income stream after you stop working your regular full-time job. You can actually work and earn money too within limits, but essentially drawing from Social Security means you are not working and earning like you did previously.
Yes, if you start your Social Security benefits at age 62 you will get a reduced benefit (less money than if you wait until your FRA—Full Retirement Age), but for many people drawing at 62 or some other age in between that and the FRA makes sense or is an actual necessity. Why? The big reason is a person’s health.
Look, you may be planning to retire really early in life for all the reasons you dream about such as being totally independent, being so successful you don’t need to work in a 9-5 job, or all or you want is to live a downsized, peaceful life on a mountain top somewhere or any other good reason. When you do it at age 30, 40, or 50, you usually still have your health on the plus side. The younger you are when you retire, the better chance that you don’t have to be consumed with any Big H financial worries about your health. It just happens that way.
But as you age, you will find that like any being ages, you need to worry about maintenance and care to keep the old body functioning and functioning well. It is a battle at best, but when you fail to do the work to keep yourself healthy (or at least be aware of your health condition) you may be lining yourself up for the worst of times ahead. Being ill and struggling to function will also include your finances.
The Healthcare and Retirement Dilemma
Healthcare gets a lot of press coverage and folks who are paying attention and doing some serious planning for retirement are worried. When polled today, healthcare and its cost are ranking as the number one concern of all Americans and that comes even with all the talk about other topics in our news headlines. Healthcare and its costs are the concerns people think about most.
According to EBRI’s 2019 Retirement Confidence Survey, only about one in five of those surveyed say they are “very confident” in their preparation for health care vs. 27% for their finances. By the way, both of those polls results are pretty frightening to me. Less than a third feel confident about their retirement planning?
The healthcare numbers relate to the fact that there are so many unknowns with healthcare and that’s because most employers have discontinued health care coverage for retirees. When you are on your own and “independent”, and you are not sure how that’s all going to work out, you are at high risk and very worried.
The Standard Cost and the Unexpected Healthcare Costs
According to Fidelity Investment’s annual Retiree Health Care Cost Estimate, the average couple who retires at age 65 in 2019 will need approximately $285,000, after taxes, to cover their healthcare expenses. Putting that into perspective for a second, if that couple gets about $2,500 a month from their Social Security benefits every year (the current average), then over the next 20 years in their retirement when you include the cost of Medicare insurance, they will spend about 48% of that money just on healthcare! And that doesn’t address the often overlooked healthcare costs that include vision and dental and hearing aids that many retirees don’t consider.
But even more worrisome and dramatic is that many people fail to think about or plan for the unexpected health conditions that can occur. They just don’t think about the possibility that they may not be as healthy down the road as they are right now.
If you are like most Americans, you think your largest expenses in retirement will be housing, transportation, and food costs. But unlike your parents’ generation—since you won’t likely have access to employer- or union-sponsored retiree health benefits—that isn’t going to be true. So, healthcare costs will likely consume the largest portion of your retirement budget—and you need to plan for that.
What’s Behind the Mounting Retirement Healthcare Cost?
There are real reasons for this problem. In general, people are living longer, healthcare inflation continues to outpace the rate of general inflation, and the average retirement age is 62 for most Americans—that’s 3 years before you are eligible to enroll in Medicare at age 65.
Healthcare is creating a huge cost gap for many pre-retirees and many people just assume Medicare will cover all your healthcare costs in retirement, but it doesn’t. The estimate is that even a very healthy retiree spends about 15% of their average annual expenses on healthcare-related expenses, for Medicare premiums, and out-of-pocket expenses. But it could be more, waaaaaaay more.
Early Retirees Still Need Healthcare Coverage No Matter What Their Health Condition
Let’s assume for a second that you are in great shape financially right now and you are looking at early retirement. You are set to FIRE (financially independent, retire early) on all cylinders and start really enjoying life to its fullest. That scenario may be perfect and you might even be sharing that with a loved one and kids too. If you are, then double down on the importance of healthcare and coverage for you and them. So how will you do that?
The Scary Choices
Buying health insurance on your own, using expensive COBRA coverage for the first 18 months after you leave your employer, or going without any insurance at all and just hoping you can make it until age 65? All of those options are scary and multiply them by any dependents you may have and you will want to think about this much more carefully. Just think about what I just said. You’re 40-something and you want to try hoping you will never need any costly medical care for you or yours over the next 20 years until you qualify for Medicare? “Medicare for All”, the idea that it will come along and protect you is still just a campaign slogan.
The Costs of Medicare
Medicare is not free. Because so many are unaware that there are both premiums and cost-sharing associated with Medicare, they fail to save enough for it. Only parts of Medicare are free, and most Medicare recipients pay a monthly premium (right now that’s about $135 a month for each person and that is deducted from your monthly benefit payment) and that can increase for those with high incomes. Prescription drug coverage, known as Medicare Part D, also has a monthly premium depending on which plan you choose and these costs can add up for people on fixed incomes who aren’t planning for it and find themselves using lots of prescriptions. My wife and I take over 20 prescribed drugs a month as I write this post and often we spend $1,000 a month just for their co-pays!
Some one third of early retirees who claim Social Security at age 62 do so to help pay for healthcare expenses until they are eligible for Medicare coverage at age 65. But if you can postpone retirement or save enough to cover healthcare costs until 65, then you may be able to defer your Social Security benefits. The longer you can wait to take Social Security benefits, the larger your monthly benefit will be.
Long Term Care, Divorce, and Yes, Inflation
I haven’t touched on some healthcare concerns that many will face, the scariest of which is long term healthcare coverage and what can happen to you if you don’t have that insurance and you need the care. It’s extremely expensive and “long term” as it says, and even if you decide to insure yourself against it as a hedge, it will cost you a small fortune in premiums for years and years starting the day you insure. But, that topic is for another day.
Another worry to think about is what might happen if you are married and then later divorce. You may be obligated to cover your spouse and your kids for health coverage for years under a divorce decree or you may, under certain circumstances, lose your own healthcare coverage if it happens. It is something you may never plan or discuss before you face it.
Last is inflation. That’s really a joker in the healthcare deck because no matter how you estimate and plan your finances, inflation may rob you of a huge percentage of your money, and that’s especially true if you are looking at 30, 40, or 50 years of future expenses. Retiring at age 30 or 40 means that’s what you are looking at.
As retirement nears, you will have several big decisions to make, including when to stop working, when to take Social Security, how to pay for healthcare, and how to generate more cash and a cash flow from your retirement assets. These decisions are interconnected and will make a difference in your living costs and lifestyle in retirement—and when you can retire.
Please don’t ever ignore healthcare in your retirement planning. While no one ever likes to think about such “what if” type things, you need to be prepared for them. Make the most of your time and prepare in advance.
Have you factored healthcare costs into your retirement planning?