Planning for Future Health Care Costs

November 7, 2016
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The usual method for estimating spending needs in retirement is to take your post-retirement household budget and tack on an inflation rate, such as 3%. Some expenses may increase at a faster rate than the inflation rate you use, others at a slower rate, but overall, expenses such as housing, utilities, food, and so on, should rise with the general rate of inflation.   Not so for health care expenses. Projecting future health care costs in retirement can be tricky because there are several factors influencing the amount you will pay for health care in the future.

Your individual health care experience
General health care expenditures notwithstanding, you and your spouse will have your own individual health care experience during retirement. As the years go by, the odds of contracting a serious illness or chronic condition increase. Even with supplemental insurance, you could be forced to allocate a higher portion of your budget to out-of-pocket expenses such as copayments on drugs and doctor visits. You may not know exactly how much you’ll have to pay for health care when you’re 75 or 80 or 85, but you can be pretty sure it will be more than you are paying now.

Longevity
The mere possibility of a long life results in higher-than-average health care expenditures. Even if you are lucky enough to stay healthy all your life and pass away peacefully of natural causes at age 100 or 105, you still will have paid 35 or 40 years’ worth of premiums. Adding these up for Medicare, Part D and Medigap premiums and rising by 5% per year, a 65-year-old who lives another 35 years would end up paying quite a bit in premiums alone — even if he or she never enters a doctor’s office. With longer life expectancy comes a greater likelihood of the need for long-term care. Even in the absence of illness, the frailties of aging inhibit elders’ ability to care for themselves.

Potential loss of retiree health benefits
As health care costs continue to rise, employers are responding by reducing or eliminating retiree health coverage for new hires and requiring current retirees to pay more for the coverage they have. If you are counting on generous retiree coverage from your former employer, you may want to consider the possibility that such coverage may be reduced or eliminated in the future, requiring you to go into the open market to purchase supplemental insurance.

How much will you need?
The amount will depend on, among other factors:

  • The age at which he or she retires
  • Length of life after retirement
  • The availability of health insurance coverage after retirement to supplement Medicare and the   source of that coverage
  • Health status and out-of-pocket expenses
  • The rate at which health care costs will increase
  • Interest rates and other rates of return on investments

The healthiest of us may need to save the most for health care. This may seem paradoxical, but think about what many people in their eighties or nineties experience: years of declining health and mobility, and accompanying high health care expenses.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

 

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Copyright © 2017. HFG Wealth Management, LLC. Investment advisory services offered through HFG Wealth Management, LLC – An independent Registered Investment Advisory firm registered with the SEC. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Therefore, any information presented here should only be relied upon when coordinated with individual professional advice. [ more disclosures ]