Two of the biggest future cost retirees will face is the rising cost of healthcare plus the cost associated with providing long term care which are not typically covered by Medicare. These two unknown cost must be addressed in a typical retirement plan. Today Americans spend approximately 3 trillion dollars on health care and these cost have risen at a much faster rate than the overall rate of inflation. Add to this the uncertainty of health care legislation and the fact that Medicare is significantly underfunded, and you can begin to understand why healthcare is a common concern among Americans working and retired.
Skilled Medical Care Cost:
According to a recent study by Fidelity a couple (both 65 years old) retiring today will need approximately $260,000 to cover the cost of insurance premiums, co-payments, plan deductibles, and other out-of-pocket drug costs. Almost 1/3 of this cost is expected to be the Medicare part B insurance premium. To get a better idea of what your cost might be, check out this healthcare cost calculator administered by AARP and Optum1. https://www.aarp.org/retirement/the-aarp-healthcare-costs-calculator/ This calculator is one of the best we have found because it allows you to enter specifics that will help customize your specific calculation taking into your prior health issues and estimated life expectancy.
Long Term Care Cost:
It is also important to remember that medical cost are separate from long term care cost. Cost of facilities and services related to non-skilled care are typically not covered by medical insurance and are in addition to the cost listed above. We typically recommend that clients consider transferring some or all of the cost of this risk via a long term insurance policy because risk pooling is usually a more effective way of covering this unknown expense than just setting aside funds. Today the median rate for a private nursing-home room is $230 a day, or $84,000 a year, according to an annual report by insurer Genworth3. In the last few years the cost of coverage has increased as several large insurers have pulled out of the market making getting quality coverage more of an issue. While policies can vary greatly based on coverage details Fidelity estimated that a retired couple would need to pay an additional $130,000 for a policy offering an inflation-adjusted $8,000 per month for a 36 month benefit period2.
For those that choose to ignore long term care insurance and just fund this cost from personal savings, experts suggest setting aside somewhere between $200,000 – $300,000 to cover long term care cost3.
Add these cost together and it’s not hard to see that retirees could need access to more than $390,000 – $500,000 set aside to cover all medical cost and the cost of long term care during retirement. There are many variables that can impact these numbers, but one thing is for sure healthcare cost are not falling. If you have questions estimating these cost or you would like a referral to a long term care insurance expert, please contact us and we can make an introduction or get you a specific quote.
Mike Mills, CFP®, CLU®, CFS