Planning for Healthcare Costs in Retirement

With healtcare costs averaging around $10,000 per year for retirees and rising, it is important to position your portfolio and utilize strategies to ensure that your income lasts your lifetime.

Health care expenses are like a wild card event - it's never certain what the illness will be, how long it will take to recover if at all, what health care regulations will be in place at the time, and what costs would look like when an unpredicatable health change occurs. One thing is certain though, the financial impact of a serious health change can be devastating. Today's typical retiree is living longer and saving less and that could bring the total expected health care costs to pay even higher. With inflation, which is expected to increase over the coming years, eating away at their fixed incomes, a negative financial impact stemming from large health care expenses can significantly lower the type of lifestyle the person envisioned to have in retirement.

Retirement healt care costs will vary depending on your health status, your life expectancy, and so on. Plan to have enough money saved to cover any premiums for you Medicare programs, deductibles, and out-of-pocket expenses.

Typically, a couple with an average life expectancy retiring in 2006 at the age of 65 could expect to need $295,000 to cover their health care expenses during their retirement years. Retirees living longer than average lives should see that number increase dramatically. For instance, if the couple lives past age 90, the estimated health care expenses for the retirees almost double to $550,000.

Health care expenses can also dictate when you decide to retire. Retiring too early before you can become eligible to receive Medicare benefits can add an additional layer of financial burden. Early retirees should consider either leveraging COBRA or purchasing private health insurance until they become eligible for Medicare. Generally speaking, private insurance is pricey and so it is important for early retirees to factor in premiums for private health insurance and other potential out-of-pocket expenses in their retirement health care savings to ensure that they can be adequately covered.

Retiring before becoming eligible for Medicare can create an additional financial burden if you do not have retiree health insurance through your employer. Early retirees should consider leveraging COBRA or purchasing a private health insurance plan until they become eligible for Medicare. Health insurance plans purchased through a private company typically have higher premiums than do group policies available through employers. If you plan or need to retire early, it is important to try to ensure that your retirement health care savings includes funds for private health insurance premiums and other potential out-of-pocket costs.

The need for extended care is another major issue for retirees and with it comes its own set of costs. A 65 year old retiree is expected to spend about 3 years in long-term care. Since Medicare offers very limited, if any, coverage for extended care costs, you will need to factor these extra costs with your retirement savings. The average yearly cost for a room in a nursing home in 2007 was $75,000. These costs are expected only to rise in the future and costs vary by region and facility.

One solution to the future long-term care needs and related expenses is to purchase long-term care insurance. Speak with your Isakov Planning Financial Advisor about the types of long-term care policies available and if the benefit on the policy will be enough to cover the cost of long-term care in the region where you live.