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We Just Got Real About Health Costs In Retirement (And It’s Not so Bad) 

Liz Weston, Health Costs In Retirement

With Liz Weston, Certified Financial Planner, columnist at NerdWallet

Steve spoke with Liz Weston, a certified financial planner, columnist at NerdWallet, and the author of five books including Your Credit Score.  Liz talked with Steve about some of the concerning numbers associated with retirement, specifically, healthcare costs and what you can do to plan ahead for your future.

Healthcare Expenses In Retirement

In her latest article, Liz talks about the fact that Fidelity finally specified a realistic number, projecting what healthcare costs in retirement will look like. An average couple that retires at 65 in 2019 will need around $285,000. This doesn’t include nursing home costs or anything surrounding long-term care.

The truth is that while this number seems daunting, it’s a good breakdown of what you can expect. You’ll also be spending six figures on food, on your home, and in a number of other areas. The real goal is to figure out what you’ll need per year and then multiply that by five. That’s the target number. This is something almost all financial planners hold to. There’s often a “U” shape when it comes to cost—your expenses will be higher, dip, and then climb a bit again. Despite how scary that number sounds, it’s not unmanageable.

Cost Variables

There are a number of variables to keep in mind when it comes to cost. You don’t necessarily know what your health will be or what inflation will do to rates. But you can kind of predict, on a short-term basis, what your health will be like as you enter retirement. Are you relatively healthy? Then your costs might not be as steep until you get further into retirement. If you have a lot of chronic conditions, they’ll manifest as time goes on. So paying attention to your health as you approach and then enter retirement can at least help you predict or have an idea of what you’ll need to spend on healthcare.

Another thing to consider is where you live. There are much lower healthcare costs in certain states. If you are concerned about your health and know you’ll need serious care in retirement, moving to one of these areas is a potential option.

Supplemental Healthcare Plans

One great way to cut down on healthcare costs in retirement is by using supplemental plans. Medicare can be confusing until you actually start using it. There are premiums and you do have to pay for Part B, which covers doctor visits, and Part D, which covers prescription drugs. Liz thinks the best way to go is with a supplemental plan known as Medigap.

An alternative is to make it a bundle, something called Medicare Advantage. It’s complicated, but it’s a good option for you if you live in an urban area. The reality is that you should get guidance from a Medicare insurance professional before you settle on any healthcare plan.

The Range Of Costs

According to the most recent research, here’s a breakdown of what people can expect to pay for healthcare. Vanguard (the mutual fund company) and Mercer (a health and benefits consultant) studied data of what people are actually spending in retirement.

Women tend to spend a little more. The average 65-year-old woman is spending between $4,900 and $6,000 per year. This includes the premium for Medigap coverage and all out of pocket costs. It also includes all costs for dental and vision care. For men, the numbers are about 2% to 3% less per year.

These are average ranges. There are going to be outliers and the amount will also change depending on your income. The higher your income, the more you’ll pay, specifically when it comes to plans and premiums. Also, some years may be higher if you are ill or have an injury. It tends to max out around $21,000 per year, but that’s generally for people who skip supplemental coverage.

Long-Term Care

One of the other major costs that tend to give people concern is long-term care, such as a nursing home. About half of all people over 65 won’t need to budget for any long-term costs. And about 25% of people in the same age group will spend less than $100,000. A good percentage of people will spend $250,000 on long-term care, and that’s a daunting number.

The truth is that the people who don’t incur any long-term care costs are being taken care of by family and friends at a serious cost to the caregiver. At some point, most people in retirement are going to need some type of significant long-term care. How much it costs really depends on who provides the care.

There’s also the matter of assets and investments. If you retire and have a home that you sell or other significant investments that you can cash in, that can go a long way to funding any long-term healthcare needs you’ll have.

If you’d like to find out more about healthcare and other costs in retirement or how to budget and manage your finances, check out Liz Weston’s articles on NerdWallet or pick up one of her books!

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: Sometimes the numbers you hear about healthcare costs and retirement are more than daunting. Fidelity says it’s going to cost $285,000. Another research company says it’s up to $400,000, and so on. You know, this is misleading, and it actually works against the notion that you can do something about it. The numbers are just too large.

So let’s get real about the healthcare costs in retirement. I’ve asked Liz Weston to join me. She’s a columnist at NerdWallet. She’s a certified financial planner. She’s the author of five books, including the best-selling Your Credit Score. She lives in Los Angeles with her co-dependent golden retriever, as she says in her bio. Hey Liz, welcome to the show.

Liz Weston: Thanks, Steve. I also live with my husband and my daughter, so it’s not just the dog.

Steve Pomeranz: Oh, okay. Are they co-dependent as well?

Liz Weston: Not a bit.

Steve Pomeranz: Oh, okay. Good.

Liz Weston: Not at all. My daughter’s 16, so no.

Steve Pomeranz: Absolutely not. Okay, so let’s get down to this healthcare issue. Because when I read your article about this, I said hallelujah. Because it is so true. You see these big numbers quoted, and nobody seems to ever break it down to really what it costs. Let’s get started here. Fidelity, as I said, says a couple, age 65 retiring in 2019, will need $285,000 for health expenses, not including nursing home and long-term care. Take us through this.

Liz Weston: Yeah. I don’t think any other number in retirement is presented this way because you’re also going to be spending six figures on food. You’re going to be spending six figures on your home. There’s a lot of other areas where you could be spending this much. What you really need to know is what you’re going to be spending per year. I don’t know about your practice, Steve, but I hear from a lot of financial planners that five years, you basically plan in five-year chunks.

If you can figure out what your costs are going to be in the first few years of retirement, that’s what you need to know for now. There does tend to be a U-shape. As you slow down, maybe your expenses will go down, and then they kind of tick up at the end. But it is a much more predictable and much more manageable number than people are hearing.

Steve Pomeranz: Also, there are a lot of variables. I mean you don’t really know the rate of inflation. You don’t know really about what your health itself is going to be in five, 10, 15 years. There’s a certain amount of uncertainty here as well.

Liz Weston: Oh, absolutely. What’s interesting to me though is that you can predict, at least in the short term, based on your health as you enter retirement. Think about it. You know the people who have a lot of chronic conditions. Even if they’re not constantly in the hospital, they’re tending to spend more on health insurance. By the time you’re in your 50s and 60s, most chronic conditions have manifested, so you know what you’re in for. Once you know that, you can have a much better time of predicting what your costs are likely to be going forward.

Also where you live. I mean, healthcare can be much less expensive in some areas than in others. But really, it’s the status of your health and the status of your parents’ health, unfortunately. Genes do matter. They don’t dictate everything. But if your parents weren’t in great health, you might have a rough time as well.

Steve Pomeranz: All right, so let’s slow down this a little bit. Number one, factors that attribute to the cost of healthcare are where you live. That I think we can understand. Your health. Whether you’re healthy. Whether you have chronic conditions. Maybe you’re a heavy smoker. All that’s going to matter. Also, there’s supplemental coverage available in addition to Medicare. It’s like, what plan are you choosing, or are you choosing a plan at all? Right?

Liz Weston: Exactly. A lot of people don’t understand Medicare until they’re actually in it. You do pay premiums for parts of Medicare. You don’t pay for hospital coverage, but you do pay for the Part B, which is doctors’ visits, Part D, which is the prescription drug. Then really, most people, I think, should have some sort of supplemental plan. That’s what’s known as Medigap.

The alternative is to wrap it all in one. It’s called Medicare Advantage. If you live in an urban area, that could be a possibility too. This is fairly complicated. I really think people should have a guidance of some kind. Whether it’s their financial planner, health insurance consultant, something like that to help them sort out the options. But that supplemental plan is going to cost as well.

Then you add into it, the higher your income, the higher your Medicare premiums can be. All of that gets factored into what you ultimately pay.

Steve Pomeranz: All right. Knowing all of this and doing the math, looking at the statistics of hundreds of thousands of people at different ages, different levels of health conditions, what are the typical ranges on an annual basis?

Liz Weston: Well, the typical range, and I’m using the numbers that Vanguard and Mercer came up with. Vanguard is the mutual fund company, the investment company. Mercer is a health and benefits consultant. They looked at actual data, of what people were actually spending. For a 65-year-old woman—because women spend a little bit more than men, two or three percent more—for a 65-year-old woman, she can expect a range of between $4900 and $6000 a year.

Steve Pomeranz: Now is that including the premium for your Medigap coverage?

Liz Weston: Yes. That’s including that. That’s including all the out of pocket costs. Here’s another thing. A lot of people don’t realize that Medicare also has out of pocket costs. It has deductibles. There aren’t any caps on how much you can pay out typically. I mean, there are certain supplemental plans that have caps. But in general, that was the range that they came up with.

It really varies. There were 10 percent of the people that spent less than about $3000. There were 10 percent that spent, I think without Medigap coverage, there were 10 percent that spent more than $21,000. There’s a huge bell curve going on there.

Steve Pomeranz: Now those figures also include dental and vision costs, right?

Liz Weston: Yes, exactly. Everything above the neck that you think might be covered in retirement is not. They don’t cover hearing aids. They don’t cover vision typically. Dental care. All that is also something that you’re going to have to save for and pay for out of pocket.

Steve Pomeranz: Okay. That’s included in this median number of $4900 to $6000, correct?

Liz Weston: Exactly, yes.

Steve Pomeranz: Okay. Let’s talk about the word median for a second. It means that half of the experiences are higher and half are lower. It’s that 50th percentile area, right?

Liz Weston: Exactly. What you can tell by that range is that a lot of people’s experience is in a fairly tight band. If we’re talking about the $4900 to—I think the actual median figure for the 65-year-old woman who has a supplemental plan, who lives in a medium cost area with medium health concerns, $5200—there’s going to be a bit above and a bit beyond for most people.

Then as I said, there are the outliers. There are the folks that only spend, essentially, they only spend on premiums. Maybe that’s $3600 a year. Or they have a typically or really bad year. If they have that supplemental coverage, could be more than $11,000. If they skip the supplemental coverage, that’s where the $21,000 figure comes in.

Steve Pomeranz: That’s right, yeah. In a worst-case scenario, a cost could exceed $11,000, and then if she did without the policy, it could be over $21,000. Those are good numbers for all of us to know and to think about when we’re calculating where we are in our financial status, so to speak. Right?

Liz Weston: Exactly.

Steve Pomeranz: Yeah. All right, let’s talk about long-term care. I get a lot of questions about long-term care. The work that we do here, we calculate the need for long-term care using lots of probability analysis and whether, in fact, people can self-fund. They have enough money to pay for it themselves. Or they should consider getting some kind of insurance.

What are some of the numbers? I mean, let me read one little statistic here that you wrote: “Half of the people over 65 will not incur any long-term care costs, and a quarter will incur a cost of less than $100,000.” That covers an awful wide swath of people. The problem is what?

Liz Weston: Well, there’s a couple problems. One is that you’re going to have about 15 percent who are spending more than $250,000. That’s a figure that takes everybody’s breath away. We all know those cases. Somebody who was in a nursing home for years or needed around the clock care for years. Als when we’re talking about, “Half the people don’t incur long-term care costs,” that’s a lot of daughters and daughters-in-law providing free care.

Before you count on that, before you assume that your family members are willing to step in, worth having that talk. Because being a caregiver costs the caregiver. They figure that women who do this kind of care give up between $300,000 and $700,000 of income and lost future retirement income. This is a huge sacrifice. Maybe it’s a tradition in your family, or maybe you’re just counting on it. But think about what you’re actually asking of your children, or your daughters-in-law if you’re expecting them to provide this kind of care.

Think about the kind of care we’re talking about. We’re talking about bathing. We’re talking about toileting. We’re not just talking about running errands, and maybe taking you to an occasional doctor’s appointment. This is serious stuff. Even if you are among the lucky people that have people who are willing to provide this care, you still might want to think about getting some long-term care insurance. Or putting aside some money to cover the costs that you …

Because most people do need some kind of help. I think they said 70 percent are going to need some kind of help. None of us wants to think we’re going to be that person. But it’s worth putting aside some money, earmarking some money, so that you’ve got it if you need it.

Steve Pomeranz: You know, also don’t forget that most of the time, there are assets that can be liquidated in order to cover costs for sometimes a significant period of time. Let’s say your elderly parent has lived in a house for many many years that’s mortgage free. There may be $300,000, $400,000, $500,000, $700,000 there. The house can be sold. They live in a facility that takes good care of them. You can use those assets. That’s a method of self-funding, and I think people forget about that.

Liz Weston: Yeah, I think they do. I think you’re right. Then a lot of people are coming into retirement with mortgages, with debt. The caution is, don’t spend that money. Don’t spend that house. If that’s all you’ve got to cover long-term care, don’t spend it on something else. That’s the importance of earmarking it and knowing what assets you’re going to be tapping.

Another one, if you’re a little bit more affluent and you do have some investments. The investments can provide you with income, and then they can be sold to pay for the long-term care.

Steve Pomeranz: Yeah. We’re out of time, but I will say that to follow up on this, for everyone who’s listening, go to the NerdWallet website. Type in, “What will you spend on healthcare costs in retirement?” There’s a little calculator there. We’ll, of course, have that on our site as well, stevepomeranz.com. We’ll direct you right to the NerdWallet website. (Click here to calculate your cost.)  But there you can answer some basic questions, and it can give you a start of some of the ideas and the amounts that you’ll probably have to pay.

Liz Weston, thank you so much for joining us. I really appreciate you writing this article and covering this area.

Liz Weston: It’s my pleasure, Steve. Thanks for the invitation.

Steve Pomeranz: To hear this interview again, and if you’ve got any question about what we’ve discussed, as I said before go to stevepomeranz.com. While you’re there, sign up for our weekly update where we talk about all of our live events and important topics that we’ve discussed right here, straight into your mailbox every single week. That’s stevepomeranz.com.