A scary retirement expense that shouldn't terrify you

Here's a projection that's likely to frighten a lot of people preparing for life after work: A married couple, both age 65, will need $280,000 on hand to cover health care and medical costs in retirement, according Fidelity. After taking into account Medicare premiums, deductibles and co-payments, that's Fidelity's 2018 estimate of the present value of lifetime payments for this hypothetical couple's out-of-pocket medical costs.

But don't panic. This married couple doesn't really need to have $280,000 dedicated exclusively to medical costs. Indeed, that would be next to impossible for most couples because $280,000 is more than the total total retirement savings that two-thirds of workers age 55 and over have accumulated.

Why don't you need to have that amount on hand before you retire to pay for your future medical costs? Because you can cover most of these expenses by paying your monthly premiums for three insurance progams: Medicare Part B, either a Medigap plan or Medicare Advantage Plan to supplement Medicare, and a prescription drug plan under Medicare Part D. 

The combined monthly premiums for all of these plans should amount to less than $500 per person for most retirees 65 or older and can be paid from their monthly retirement checks from Social Security, pensions, annuities and systematic withdrawals from savings (but affluent retirees might pay higher premiums for Medicare Parts B and D).

What about people who retire before turning 65, Medicare's eligibility age? According to a Fidelity survey, almost all respondents who did so reported that they had some form of health insurance until they were eligible for Medicare. However, more than one-third reported paying premiums of $500 per month or more. That's why it's important for workers retiring before 65 to secure health coverage and factor its premiums into their monthly budgets.

Unfortunately, even if you've arranged to pay for medical insurance premiums, you're not finished planning for health care costs in retirement. Fidelity's estimate doesn't include expenses for dental, vision and hearing aids. While these items might not ruin you, they can amount to hundreds or even thousands of dollars each year. So if you need these items, you'll want to budget for them. 

Older workers do face one potential budget buster: Long-term care. Fidelity's estimate doesn't include estimates for this expense, either. Many Americans are uninformed about the risk of potentially ruinous long-term care costs and the impact they might have on their families. While this threat has no sure-fire solutions, you would be wise to adopt some combination of:

  • Buying long-term care insurance
  • Holding home equity in reserve to tap for long-term care expenses, if needed
  • Setting up a separate reserve of assets that's not used to generate retirement income
  • Buying a longevity annuity that adds extra income in your 80s
  • Being vigilant about taking care of your health

Regarding that last point, if you're approaching your retirement years, you should understand the implications of poor health on your finances and lifestyle. Such awareness might convince you to work longer to let your savings and Social Security grow, put money into a health savings account and participate in your employer's wellness program to make crucial changes that can improve your health.

The fact is, living a long time in retirement can be expensive. While that realization might be frustrating and intimidating, consider that a few generations ago, most people didn't live long enough to incur significant costs for medical and long-term care. Given this perspective, you'll want to just roll up your sleeves and work on these challenges, tough as they might be.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.