The Investment Scientist

Preparing for Health Care Costs in Retirement

Posted on: January 28, 2012

Healthy Lifestyle

Longer life spans, rising medical costs, declining retiree medical coverage, and Medicare and Medicaid insolvency all add up to making health care costs a serious challenge for folks preparing for retirement.

According to Fidelity research, a couple retiring today at age 65 will need current savings of $200k to supplement Medicare and pay for out-of-pocket health care costs in retirement. In another five years time, the number could balloon to $275k. And that’s before we talk about long-term care.

For Americans who are turning 65, the odds that they will be admitted to a nursing home at some point in their life is about 60%. Half of them will stay for six months or less, but 10% will stay for more than three years. The unlucky 1% will stay for more than 10 years. A nursing home could easily cost $10k a month; you can do the math of how much it will cost you if you fall into the unlucky 10% ($360k) or even 1% ($1.2mm.)

If you are in your 40s or 50s and you are facing this prospect of escalating health care costs, what can you do? I suggest three things:

1. Revise your retirement money needs. The common wisdom is that in retirement you will spend 20% to 30% less because, by then, you would have paid off your mortgage, and your kids would have all finished college. That may be true, but what you save from mortgage payments and kids’ education will go towards your own health care. In a nutshell, you will not need less money to live; you will need at least the same. With this in mind, you may need to save more now.

2. Consider buying long-term care insurance. The optimal time to start considering that is between 60 and 65. If your personal assets are over $2mm, you may be able to self-insure. If your personal assets are below $1mm, you definitely should consider long-term care insurance.

3. Live a healthy and active lifestyle. A recent study of health care costs has found that 5% of the sickest people in the population use up 50% of all health care expenses. That is to say, by merely being not among the sickest 5%, you will only need to pay half of the average health care costs. If you are among the more healthy 50% of the population, you only need a fraction of the $200k to $270k to cover your out-of-pocket health care costs.

It is with this in mind that I watch my diet closely with the help of my iron lady wife and work with a physical trainer to help me exercise. Let me tell you hiring a professional trainer is a great investment. It costs me about $200 per month now, but I am living healthier and happier – exercising does make people happy – and I can expect to save hundreds of thousands of dollars when I retire.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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