Preparing for retirement health care costs just got a little more difficult. With this winter’s Fiscal Cliff deal, the federal government upped the deduction threshold for medical expenses from 7.5 percent of your adjusted gross income to 10 percent. The good news is this only applies to those over age 65.
On the other hand, those who are of retirement age may find themselves faced with an unpleasant surprise if they haven’t properly anticipated health care.
As we noted last summer, a report from Fidelity Investments revealed that a 65-year-old couple retiring last year would need an additional $240,000 to cover out-of-pocket costs not covered by Medicare. That $240,000 figure is a 4 percent increase over 2011 costs, but it’s still under the 6 percent annual average rise since 2002, according to Fidelity.
So what should you do (and not do) to prepare for health care costs in retirement?
- Develop a retirement spending plan. USA Today notes that Fidelity offers retirement calculators, as does AARP, if you need help doing so. Faith Xenos, chief investment officer for Singer Xenos Wealth Management, tells The New York Times that she counsels clients to set aside 5 percent of their annual budget for health-related costs and deductibles.
- Save for retirement healthcare. In the same way that you can earmark a savings account for higher education, a home purchase or a vacation, you can also earmark a CD, Money Market Account or Online Savings Account for retirement healthcare costs. Plus, you can also look into opening a Health Savings Account that would allow you to pay for health costs with pre-tax income.
- Consider buying long-term care insurance. The U.S. Department of Health and Human Services estimates that 70 percent of those over age 65 will ultimately need some kind of long-term care.
- Consider buying disability insurance while you’re still employed. USA Today cites a Sun Life Financial survey that says roughly 9 percent of workers have withdrawn from retirement savings, borrowed money, or sold assets to pay for a serious medical condition. Roughly half of those people say they’ll never be able to replenish that money.
- Think you won’t have to worry about retirement healthcare costs. “One hundred and ten million Americans have at least one chronic disease,” Joseph F. Coughlin, director of the Massachusetts Institute of Technology’s AgeLab, tells The Wall Street Journal. “Sixty million of us have at least two; and 20 million of us won the lottery ticket of five chronic diseases.”
- Retire too young. Unless money is no object, consider working longer to deflect healthcare costs. Notes U.S. News & World Report, one of the perks of spending more time in the workforce is that you get to stay on your employer’s insurance while you continue saving for retirement. “If you’re retiring early, healthcare is a huge unknown,” Carolyn McClanahan, director of financial planning at Life Planning Partners, tells U.S. News. We don’t know what it’s going to look like or how expensive it’s going to be.”
- Neglect your health. One key way to keep healthcare costs down is to retire healthy, Dr. Wendy Richards, national medical director for Aetna’s commercial business, tells U.S. News. “It helps to implement health and wellness strategies well before retirement,” she says. “Try to keep yourself as healthy as you can, and if you do have chronic conditions, manage them with your doctor. Obesity, diabetes and heart disease add to the bottom line because of co-pays.”
- Forget to budget routine healthcare costs. “I recommend that people have a category in their budget for routine healthcare costs,” Dr. Kathryn McCabe Votava, president and founder of health care consultancy GoodCare.com, tells The Wall Street Journal. “That includes premiums, co-payments, uncovered costs… Maybe it’s $6,000 a year per person.”
Have you been saving enough for your retirement healthcare? How are you budgeting for it?