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Health Shocks and Retirement

In survey after survey, running out of money in retirement is ranked highest among fears of many retirees. Healthcare ranks high among the list of expenses that can break the budget for retired people.  Most worrisome is the possibility that an unexpected Health Shock may arise, causing healthcare expenses to quickly jump taking a much bigger bite from your pocketbook.  At HCM Wealth Advisors, we help you examine these types of risks and decide the best way for your Family to prepare.

Healthcare in Retirement

Estimates of future healthcare spending needs can be scary.  A popular example is Fidelity’s 2018 estimate that a couple retiring at age 65 will need $280,000 just to cover uninsured medical expenses, excluding long-term care.

At age 65, 10% of the median household’s total expenditures are devoted to healthcare spending, according to the Bureau of Labor Statistics.  By the time we are 85, the median household spends about 20% of their budget on healthcare.  This is where the statistics can be deceptive. Some people in this age bracket actually spend very little on healthcare, while others experience health shocks and wind up spending very significant sums.

Responding to Shocks

David Blanchett studied the impact of healthcare shocks on seniors and found that people are quick to adjust by reducing spending in other areas.  He found that spending on durable goods (items made to last for a long time), was relatively unchanged, while spending on nondurable goods declined significantly to absorb the shock.   In this instance, durable spending represents things like mortgage payments or rent, which are relatively fixed.   Specifically, Blanchett found that, for every 1% increase in healthcare costs nondurable spending drops by 0.5%.  This process happens so naturally that most people don’t even notice it.  It is because as we age most people naturally move from their Go-Go years to Slow-Go years and eventually No-Go years.  As activity levels naturally slow, so does our spending on things like travel, taking pressure off the budget.  This gives us the ability to more easily afford increasing healthcare expenses.  So, when planned for properly, it is not the natural increase in healthcare costs that we need to worry about.  It is the unexpected shock that can be financially devastating.  

What You Can Do

First, take a personal inventory of your health today!  Ask, what you should be doing today if you want to dance at your 100th birthday party? (Tip: in addition to better eating and exercise – start stretching every day.)

Next, your financial planning should consider the possibility that something like this could happen to you or your spouse.  Decide well in advance how you would like to handle this type of situation should it arise, and plan accordingly.  Possible solutions range from getting help from family, to using insurance to handle some or all the risk, to self-insuring with your own financial resources.  And, be realistic, if you have a chronic condition, you should probably expect to pay more than average for your healthcare.  

The greatest challenge is to those who experience a health event which they failed to plan for that requires long-term nursing care, which can easily cost $90,000 per year or more.  Researchers forecast that roughly one in seven people will face these costs for two years or more.

In addition to insurance and personal savings, reverse mortgages can be a safety valve in these situations because they provide access to a lump sum of tax-free cash-flow.   They are not appropriate in all situations but can be a very useful tool when the situation is right.

Finally, if you’re still working, consider choosing a high-deductible health-insurance plan.  Such plans often allow people to put up to $7,000 a year into a Health Savings Account that can used tax-free in retirement.

Do you have questions about healthcare spending in retirement?  Maybe you’d like to learn how to best utilize an HSA?  HCM’s financial advisors are fiduciaries, which means we put your interests first, always.  Give us a call or schedule a meeting to learn more. 

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