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July 2, 2020
For many of today’s retirees, health is the most important ingredient for a happy retirement. You might say that they value good health over financial security.
This sentiment also rings true for baby boomers–Americans born between 1946 and 1964–who are either recently retired or are preparing for retirement.
Baby boomers are taking charge of their health and may demand more from the health care system than their parents did.
But this generation–and future generations–will need to consider the rising costs of health care when planning for a happy retirement, especially since paying for healthcare is a concern for many Americans.
To prepare for these costs as you approach retirement, financial planners suggest taking these five considerations into account.
When discussing healthcare, most people probably envision trips to the doctor, procedures, medications, and long term care.
But it can include much more than that in retirement, says Sarah Swantner, a financial advisor with Rapid City, South Dakota-based Kahler Financial Group.
“One of the things we talk about with our clients is: what are your goals? What would really bring you meaning in your life? What goes along with that is a discussion around how you are going to stay healthy and how much that’s going to cost,” she says.
Exercise programs, shopping at health food stores, and activities that nurture your mind, body, and spirit are all things to consider when preparing for the costs of good health in retirement.
As you’re evaluating your current savings and projected costs during retirement, make a separate budget for health care costs. This will ensure you stay on track and don’t overspend any account.
“One of the things we help clients do is come up with a total dollar amount that they can safely spend each year,” Swantner says. “So the next step is to say, if you can safely spend $50,000 per year, then let’s allocate some of that to health care. This is going to be part of your regular expenses.”
Don’t wait until your health declines to start planning for these costs. One mistake retirees make is excluding health care costs from their budget early in retirement, with the notion that they can cut spending on everything else once their health declines later in life.
“There may be lots of health care costs at that time to maintain a comfortable life,” Swantner says, adding that the earlier you plan for these costs, the better.
Many people approaching retirement significantly underestimate the impact inflation and taxes will have in retirement.
But financial planners suggest inflation, specifically, should be part of a healthcare budget in retirement.
“When I run retirement projections, I usually use a 2.5% inflation rate for overall retirement expenditures, but I use 5.5% inflation for health care,” says certified financial planner Cynthia Petzold, of Roanoke, Virginia-based CommonWealth Financial Planning, LLC. “You can see how $10,000 a year in health care costs for today’s retiree can balloon to tens of thousands of dollars annually by the end of retirement.”
Most people become eligible for Medicare, a federal health insurance program, when they turn 65. But original Medicare (Parts A and B) may not cover all of your health care costs.
Medicare Part A pays for hospital care, while Part B pays for doctor visits and other outpatient care. You can enroll in a Medicare supplemental insurance plan to help pay for costs and benefits that aren’t paid by Original Medicare Parts A and B. You can also enroll in a stand-alone Medicare Part D plan to help for prescription drug costs.
“Be aware of what Medicare covers and doesn’t cover,” Petzold says. “Most people will need either their employer’s retiree’s health insurance or a Medicare supplemental (Medigap) policy plus Medicare Part D for prescription drugs to cover Medicare Parts A and B deductibles, coinsurance and other costs not covered by Medicare.”
Learn more about and compare Medicare supplemental options.
Whether you’re five years away from retirement (or 15 years out), start planning for your health care needs now.
Though having a financial planner will help you navigate the costs of health care, you can start preparing for the future on your own by embracing a healthy lifestyle now, Petzold says.
“[Control] those aspects of a healthy lifestyle that we can control: quit smoking, exercise regularly, eat right, lose weight if necessary,” she says.
Additionally, do your homework: Educate yourself on your retirement health care options. Finally, as with other aspects of retirement spending, save more, and spend less now. Doing these things will help ensure you have a healthy and happy retirement.
“With people living much longer and health care costs increasing more rapidly than the rate of inflation, all pre-retirees need to plan for health care costs, year in and year out, for the rest of their lives,” Petzold says.
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