Retirement Planning: 3 Ways to Calm Your Terror Over Health Care Costs

Retirement Planning: 3 Ways to Calm Your Terror Over Health Care Costs
Healthcare costs for retirement can be terrifying.
Healthcare costs for retirement can be terrifying.

Health care costs are one of the largest — if not the largest — expense you will face in retirement.

Over the course of the an average married couple’s lifetime, out of pocket health care costs could total a staggering $394,954 — $463,849, according to recent research from HealthView Services.

If these numbers terrify you, you are not alone.

In fact, a 2014 Nationwide Retirement Institute (NRI) survey found that 62% of baby boomers used the word “terrified” to describe how they feel about health care costs in retirement, and 72% say health care costs are their top concern for their retirement years.

“Our own research shows that when we talk to clients, the word ‘terrified’ comes up,” says Roberta Eckert, vice president of the NRI. “Part of it is because of the unknown — there’s so much they don’t know about. But the more you know the more equipped you are to tackle those costs.”

While many people plan to work in retirement to cover some of these expenses, few actually do, NRI reports. Often health problems arrive years sooner than expected and derail those plans.

So what can you do now to prepare? Eckert weighs in, sharing three ways Americans can plan for the unknown.

1. Educate Yourself

“Provide yourself with as much education as possible,” Eckert says. “Knowledge is power.”

Underestimating the costs of health care in retirement can be detrimental. Don’t leave it up to guesswork; get a customized financial report that can help you better plan for your future.

“We have the capability to provide a report that is specific to an individual and is based on a dozen questions centered around [that person’s] lifestyle, family history and their own health to dial into what their health care expenses will be, so they don’t leave it up to guesswork,” Eckert says.

With that report, you can work with a financial advisor on a long-term retirement plan that won’t leave you strapped for cash.

“The other thing we do is educate people,” Eckert says. “We have a client conference [that includes] presentations — we’re not driving anyone to buying a Nationwide product. If we can empower people with information, they can make better informed financial decisions.”

You can also use an online retirement calculator.  The NewRetirement Retirement Planner can help you estimate your healthcare costs and model when they will occur during your retirement.

2. Maximize Income

For the average couple retiring this year, the HealthView Retirement Health Care Cost Index shows that total health care costs will consume two-thirds of their lifetime Social Security benefits. For the same couple retiring in 10 years, approximately 90% will go toward health care expenses, the recent study shows.

Social Security — For this reason, maximizing your Social Security benefits will be even more important in the years to come. Optimizing Social Security is one strategy Eckert suggests Americans take to prepare for health care costs in retirement.

Waiting to collect your Social Security benefits until age 70 can dramatically increase the amount of money you receive. In fact, benefits can increase up to 32% if you wait until age 70 to start collecting, which could translate to an additional $300,000 in benefits over the course of a couple’s lifetime or $100,000 during an individual’s lifetime.

This “found money” can help offset the increasing costs of health care, Eckert says, which is especially important as health care inflation is expected to rise.

Over the last 50 years — excluding the Great Recession of 2008 — health care cost inflation has averaged well above 6%. Since the Recession, health care inflation has fallen below the long-term trend, but that won’t last forever, the HealthView study notes.

The year-end 2014 summary from the Centers for Medicare and Medicaid Services (CMS) expects retirees to endure at least eight years of health care inflation between 5% and 7%

Other Products — To plan for these increasing costs, Eckert suggests looking into products that provide guaranteed income streams, such as annuities with inflation riders, long-term care insurance, life insurance policies that accumulate cash value, and mutual funds.

“When you can align a guaranteed income stream and some of the products that have inflation riders or features with those essential expenses, then the client might feel more comfortable,” Eckert says. “They might also feel more comfortable taking more risk with the other parts of their portfolio to generate money for their discretionary expenses.”

3. Work With a Financial Advisor

Above all else, seek professional help from a financial advisor who can prepare you for the transition into the unknown.

It’s never too early for workers to discuss health care costs during retirement with a professional financial advisor, but — as the NRI survey shows — an overwhelming 77% of pre-retirees say they have not sought out an advisor to discuss retirement planning.  “Having an advisor is very important — it takes the emotion out of a lot of decisions,” Eckert says.

A good retirement calculator can also help you estimate your retirement costs.  One of the most popular features of the NewRetirement Retirement Planner is a chart that shows you if and when you might run out of money in retirement.  A good plan for how to fund healthcare costs is often the difference between having enough and running out of money.

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