The following was posted by Mark Miller. For the full story go here: http://wealthmanagement.com/retirement-planning/retirement-and-health-care-bad-rx#comments
Retirees will need to amass small
fortunes to pay for their health care, we are told. The lifetime forecasts
typically range from $150,000 to $400,000. But what do these figures really
mean in a planning context?
After all, an individuals mileage
will vary greatly depending on health, longevity and a variety of other
factors. The Employee Benefit Research Institute (EBRI) says men retiring in
2020 can expect to spend a median of $109,000 on health care; for women, the
corresponding median figure is $156,000. However, EBRI’s 90th percentile
forecasts are far higher: $313,000 for men, and $357,000 for women.
In addition, these figures
exclude long-term care. The estimates do include the out-of-pocket
expenses that Medicare doesn’t cover, typically premiums for Medicare Part B
(outpatient services), Medicare Part D (prescription drugs) and a Medigap
supplemental policy, co-pays plus dental and optical care.
People also don’t fully
understand the risks. A recent study published in the American Journal of
Law and Medicine finds that most Americans underestimate what they’ll spend
on health care by a wide margin. The researchers asked over 1,000 Americans,
age 40 to 80, what they expect to spend on healthcare in retirement; the median
estimate from women for 2020 was $30,000, and men said they expected to spend
$60,000.
“Healthcare typically accounts
for 15 percent to 30 percent of discretionary expenses in retirement, but it’s
the one thing people know the least about,” says Ed Murphy, head of
defined contribution at Putnam Investments. Putnam offers a health care
cost estimator as part of its online Lifetime Income Analysis tool, which is
made available to workplace retirement plans served by the company.
HealthView projects likely
healthcare costs for specific individuals by taking into account the key
variables:
· Longevity. Current
age, expected year of retirement and gender all are factors that can help
predict the total number of years of healthcare that must be funded.
· Health. A
retiree in excellent health likely will live longer, which actually drives up
lifetime expense. A retiree with major health problems may consume health care
services more intensively, but much of that will be covered under Medicare -
and she/he may not live as long.
Location. Although
Medicare B and D premiums don't vary nationally, Medigap supplemental premiums
are set and regulated at the state level and vary substantially.
Income
in retirement. High-income seniors pay stiff Part B and Part D premium
surcharges. The surcharges affect single filers with more than $85,000 in
annual income and joint tax filers with income over $170,000.
Currently, the high-income surcharges affect just five percent of seniors, but
that is on track to hit 14 percent by 2019 under the Affordable Care Act.
The surcharges
are substantial. This year, filers with income over those amounts
pay 146.90 per month just for Medicare Part B - $42 more than the basic
premium. Surcharges also apply to Part D, and they run up through a series of
higher income brackets; at the highest end, the Part B premium is
$335.70, or $230.80 per month higher than the basic premium.
The following serves to illustrate how much health care
expenses in retirement can vary. For example, expenses for a 55-year-old man
can vary greatly, depending on health and location. A diabetic man with high
cholesterol living in Hawaii (life expectancy from age 65: 12 years) would
spend just $123,000, compared with $457,000 if the same man is in excellent health and lives in New Jersey
(life expectancy: 24 years). Meanwhile, a healthy 55-year-old woman living in
Hawaii (life expectancy: 26 years) can expect to spend $399,000 in retirement,
compared with $488,000 in Minnesota. And so on.
One of the biggest unknowns in
health care planning: is future increases in medical costs. HealthView’s
software assumes that health care prices will rise in a straight line by about
seven percent per year; you may think that’s too high or low - depending on
your optimism (or pessimism) about the future of the U.S. healthcare system.
Lately, costs have been moderating: Medicare per-beneficiary
spending rose only 0.4 percent in fiscal 2012, and overall
Medicare spending was up just 3 percent, according to the Congressional Budget
Office.
In addition, the projections look
more manageable expressed in today’s dollars. For example, our excellent-health
female New Jersey will need $244,000 at age 55 allocated to health care. Our
poor-health male in New Jersey would need about $99,000 set aside.
Most advisors can identify ways
to plan against numbers like that, argues Ron Mastrogiovanni, CEO of HealthView
Services. He points to strategies such as maximizing Social Security income
through delayed filing, or tapping home equity and setting aside a portion of
the proceeds now as conservatively-invested lump sum.
“Even though numbers are large,
there’s so much we can do about it,” he says.
Mark Miller is a journalist and
author who writes about trends in retirement and aging. He is a columnist for
Reuters and also contributes to Morningstar and the AARP Magazine. Mark is the
author of The Hard Times Guide to Retirement Security: Practical Strategies for
Money, Work and Living(John Wiley & Sons, 2010). He edits
RetirementRevised.com .
A new report by Paris-based Natixis Global Asset
Management examines “how well retired citizens live in 150 nations,” according
to 20 measures, including wealth, healthcare costs and “quality of life.” It’s
conclusions surprised even those who prepared the report. The United States,
long considered the place of opportunities, ranked only 19 among world powers,
coming in behind Noway, Austria, Germany, France and even the Slovak Republic,
whose citizens earn less than half that of the average U.S. worker. Read more
here: US Retirement
Security
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