The Biggest Retirement Expense Not Enough People Are Accounting For
April 4, 2018
For many Americans, the most challenging aspect of retirement preparation is estimating unexpected costs. How does one begin to go about figuring out the unexpected? It is inherently a difficult task, however, it must be done.
You don't want to sacrifice everything you planned on enjoying in retirement just because you didn’t plan proactively. The Consumer Financial Protection Bureau reported earlier this year that medical debt was the most common reason for someone to be contacted by a debt collector.
Proactively planning for the unexpected can be overwhelming, but we will break down how to carefully analyze your situation, and make the most educated guess possible.
The main objectives are to figure out what won’t be covered and to anticipate what health issues are likely to arise based on your family history.
Consider the following:
- Expected coverage
- Medicare coverage
- Lifestyle Current health
- Family medical history
- Average national costs of potential health issues
- Life expectancy (As difficult as it may seem, there are tools to help calculate life expectancy)
- Employee-sponsored insurance plan
While retirement calculators are a great place to start, they’re not the end all be all. It’ll take more than a general calculator if you want to be 100% prepared for retirement. Just as you would for budgeting, it’s important to consider every aspect of where your money will go because things add up.
The Unhealthy Growth of Medical Expenses
According to Fidelity's Retirement Health Care Cost Estimate a couple, both aged 65 and retiring this year, can now expect to spend an estimated $245,000 on health care throughout retirement, up from $220,000 last year.
Because of the advancement of medicine, life expectancies continue to increase, which means there is a higher probability of unexpected health issues that will accumulate for longer periods of time. You want be prepared so you don’t put out your adult children. This is where the burden usually falls outside of crowdsourcing funds or assistance programs.
If medical expenses weren’t bad enough already, they’re continuing to increase at a rate higher than any other expense. Currently, housing and transportation command the largest percentage of the average budget, but from 2006-2016, the largest increase in expenses has been healthcare at 67%.
It is best to assume your health insurance won’t be enough. Assuming you meet the eligibility requirements, having an HSA can be a great way to avoid a plan with high deductible. You can also contribute through a payroll deduction, which is pretax, or make tax-deductible contributions. Additionally, any interest earned can be withdrawn tax free.
Either way, you’ll want to make sure your money is invested in low-risk investments. Medical inflations continue to increase at a rapid rate, which is not usually accounted for in most budgets.
According to PwC’s Health Research Institute (HRI), medical inflation continues to outpace the overall economic inflation rate despite improved conditions, including innovative healthcare sector disruptors and a more informed average healthcare consumer.
It is best to limit risk as retirement nears, but the rapid rate at which medical expenses increase make it too hard to ignore.
Long Term Care and Chronic Illness Riders
What happens if you need long-term care (LTC) or get a chronic illness? If you can qualify for a long-term care rider for a permanent life insurance policy, the insured will be able to take funds from the policy and put it towards their LTC or chronic illness costs. When the insured dies, the benefit that has not been used will then be given to the beneficiaries.
A rider is simply an add-on feature to your insurance policy. In order to qualify for this benefit, you must not be able to perform 2 of the 6 activities of daily living: eating, bathing, getting dressed, going to the bathroom, walking, or continence.
If eligible, it's something to consider, since your only other options to pay for these large expenses are: paying yourself, donations/charity, and government assistance, such as medicare and medicaid, which is limited.
Be Prepared For Unexpected Healthcare Costs
Whether you’re already in retirement or still many years out, it’s never too late or too early to start creating a retirement plan. It is generally recommended to start this plan 10 years before retirement, and to refresh again a couple years before for more accurate estimates.
Give yourself peace of mind when you will want it most. You’ll thank your past self for doing your present self a big favor.
Polaris Greystone Financial Group, LLC is a federally registered investment adviser. The information, statements and opinions expressed in this material are provided for general information only, are based on data we believe to be accurate at the time of writing, and are subject to change without notice. This material does not take into account your particular investment objectives, financial situation or needs, is not intended as a recommendation to purchase or sell any security, and is not intended as individual or specific advice. Investing involves risk and possible loss of principal capital. Diversification does not ensure a profit or protect against a loss. Advisory services are only offered to clients or prospective clients where Polaris Greystone Financial Group, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Polaris Greystone Financial Group, LLC unless a client service agreement is in place.
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