PLanning for health care costs in retirement

Thats the "million dollar" question. First the out-of-pocket cap has been inflating more like 15% a year since the early 1990s when there was brief respite due to managed-care. There is annual inflation

8%-10% plus age-cohort inflation (40% more each 5-year-group older). A five-year doubling rate is unsustainable, with no clear solution in sight. For instance, your costs will increase by 30 times by the time you reach medicare age then.

Second medicare coverage may be crumbling. Medicare never covered as much as your employer program. It has a "list price" for Part A, B & D (doctor, hospital & drug) of $900 a month in 2008, but the government pays $778 of that with the retiree paying the rest. As part of the drug law, "well off(*)" retirees will pay 50% of premiums, phased in over the next several years. Plus the medicare premiums and co-pays are inflating a high annual rate too. Theres another medicare option Part C- the HMO option wich sounds the cheapest to consumers. But a NY Times eidtorial yesterday recommended termination. Plus hearings in Congress this week are heading in the same direction. Part C is too expensive and not availble in low-income neighborhoods is the claim.

(*) "Well-off" is currently just top 7% of retirees. But the definition intentionally has no COLA adjustment, so will be top 50% by 2020.

Relentless medical inflation make the projections extremely grim. Premium and co-pay costs will easily consume half of an early retirees expenses in a decade or two if this keeps up. None of the presidential candidates is talking drastic reform - just some bands to get more people to buy insurance. I suggesrt a rule of thumb is to compute what you need for non-medical costs and double it to be on the safe side.

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I googled "cost of health care in retirement" and quickly found the following statement:

"According to a March 2006 study by Fidelity Investments, a retired couple without employer-sponsored health insurance can expect to pay $200,000 for out-of-pocket health care costs like premiums and co- pays."

Further, at personal.fidelity.com/planning/retirement/ plan_overview.shtml.cvsr?refpr=rrc18, has a breakdown of estimated healthcare expenses, and states, "Fidelity estimates that an average

65-year-old should plan for at least $551 monthly or $6,631 annually in healthcare expenses."

Dave

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I would lay odds that what you're reading now will not exist 20+ years from now.

Your costs might depend on what kind of health care *needs* you'll have in retirement. Are there lifestyle changes you could make now to better protect yourself now and in the future? That may be the best investment you can make toward your retirement health care costs.

Elizabeth Richardson

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Why in your 50's?

LTC is about 50% more expensive at 55 than it is at 40 and that's in today's dollars. The growing healthcare problems that others mentioned drive the price of insurance up. If there are not drastic changes in the healthcare industry, you could end up paying multiples of the current rates.

What if health problems arise? They tend to show their surface right about that time. A significant health problem can not only make you uninsurable but also increase the likelihood of needing LTC. That's a double whammy!

disclaimer: I sell LTC (that's not a solicitation) so take my advice with a grain of salt. But unless budgeting is strict, you should reconsider your long-term care plan.

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Kastna, I think this is excellent advice. LTC insurance can be almost dirt cheap at the ages of the OP. This couple has time to shop for a good policy without feeling pressured to make a decision. Still, like you say, they should buy when they are young and still insurable.

Elizabeth Richardson

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I don't think it's useful to project a cost like this 25+ years into the future. An 8% growth rate over 25 years, in a world of 3% economic growth, would mean health care had turned into about 55% of the US economy by then (it was about 17% last year and if you inflate it at 8% while the economy overall grows 3%, that's the result).

Perhaps that's the problem with that Fidelity claim (that in 2006 a 65 year old retiring couple needs ~$190k for health care). The median retirement savings for the age 55-64 bracket was is in the $60k range based on numerous studies including Fidelity's. So there is a serious disconnect. If $190k is correct, only a few percent of the US population will obtain adequate health care in retirement, because very few have so much saved that they can reserve $190k for health care.

One interesting approach to the problem is an HSA and high-deductible insurance. If you save money in the HSA each year and don't draw much, the account builds, and you can invest the money in mutual funds. If you were to keep it up through a couple decades, even with some costs paid along the way, you'd have a sizable nest egg designated specifically for medical expenses. You could use that to pay long-term care costs, or purchase a LTC policy. The money is freed up for the savings because of lower health insurance premiums during your working life. And it's all pretax money, that is never taxed as long as your HSA distributions are used for allowable expenses.

-Tad

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One piece of advice that I would like to offer.

Since the OP would be starting at a "younger age", with a reasonable premium, I would suggest that he examine the possibility of a "Ten Pay" contract. Such a contract, with a good LTC provider, would ensure that the PREMIUMS do NOT increase with time. Contract sold with a Ten Pay feature have a LOCKED-IN premium.............

Items to look for:

inflation rider ALL inclusive coverage (Home, Assisted Living, Nursing) "Bucket of Cash" concept (you buy a $ amount, use it for what ever comes)

Cal Lester CLU

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Of course there is a huge disconnect. The saving rate is reported to be negative. But just because most people will not properly prepare for retirement doesn't mean that the cost estimate is worthless. I suspect those who frequent this m.i.f-p are probably more connected than the general public. They will regard such a number as a wake-up call and plan for it.

Dave

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You're right, the point of the study is to show how far behind everyone is. But these numbers are on their face unrealistic. They're assuming that somehow health care providers will continue to put through big annual cost increases, over a period of decades, even though the figures show that very few of today's retirees can afford them. That fails econ

101, there's no money to sustain it - an extreme example - it would be like projecting this year's increase in gas prices forward for 20 years. Either pricing eases, or demand eases.

Fidelity's 11/07 paper on retirement predicts that an average 65 yr old couple needs $215k in savings today, just for health care, excluding prescription drugs and some other common costs. They assume 7% inflation for 17 and 20 years (life expectancy of the couple), and 5% earnings on the money, and costs evenly distributed throughout retirement.

How do you sell $215k of health care to people who only have $60k to spend on all retirement expenses? And that 7% annual inflator, if economic growth (GDP) is 3% annually, would leave health care expenditures as 36% of the US economy in 20 years. The growth in costs should collapse well before that, precisely because the money isn't available to pay them.

-Tad

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That might be true if retirees were the only consumers of health care. But they are not. Health care costs will continue to rise because the American people demand the latest and best possible health care, and there are plenty of people with insurance that will pay for it. As an analogy, just because the majority of people can't afford a Lexus (probably including many people who drive one) doesn't mean that the price of Lexuses (Lexii??) won't increase every year. If you want a Lexus, you have to have enough to pay for it. If you want the best medical care, you will have to have enough to pay for it.

Dave

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In all seriousness and if only for peace of mind, in addition to the other suggestions you might want to consider investigating those countries with single payer, universal health care. Specifically, find what would be necessary to live there and receive this. As a U.S. citizen also in her

40s, and of decent means (knock on wood should my health fail), this is something I am considering.

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"Dave Dodson" wrote

pretty clear that Americans want the most possible services. Whether those services labeled "health care" actually are for the care of health is another issue, though. Time and again, studies show that many medical procedures and courses of treatments are known to be questionable and sometimes detrimental, yet they continue to be prescribed.

If one wants to plan financially for health care costs, it does pay to shop around and study on what the best bet is for a course of treatment. Fortunately the resources for doing this are better all the time. Not perfect, but better.

I believe both patients and health care facilities are increasingly revealed to be in the red. Hospitals are shutting down in many areas, for one. Physicians are driven out of practice in specialties such as Ob-Gyn. New med school graduates haven't financial incentive to become primary care physicians, so the shortage in this specialty has been growing quickly in the last decade.

A little good news is that, yes, the market is working to some extent, in that some of the healthiest and those actually able to afford health insurance are refusing it. This raises the costs for those less healthy and less able to afford. Then more of those who are less healthy and poorer drop their health insurance (or are dropped by their insurers). They report to ERs etc. and are subsidized by those who can afford to pay, one way or another. Spiraling worsens. And so forth. Now, due to market action, health care cost and access is a leading issue in U.S. politics.

I think there is a lot to some simple concepts like "insurance won't work very well if only those in Category X (tendency to be sick) have insurance." In auto insurance, I thought it had become clear in many states that rates are lower if all are required to have it. Until all are required to have insurance, and even afterwards, I agree with E. Richardson that preventive care must be a pillar of each person's health cost planning. One does have control over this. It may require some study, at times, to determine which procedures actually are effective, but this study is a good investment of time. Plus, as I have noted here before, corporations like Safeway have provided much evidence that requiring preventive medicine of its employees has a dramatic effect on health costs.

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Just to add spice to the excellent comments on this thread, here are two admittedly contrarian thoughts on LTC insurance:

1. I've always considered LTC insurance to be like life insurance in that if a person does the right things over their lifetime (save/invest regularly, pay off/avoid debt, etc.), they outgrow their need for both life and LTC insurance. (They'll be able to self-insure with their assets.)
2. Buying life/LTC are also similar in that when buying either coverage per unit costs of insurance are less at younger ages. But when you adjust for a longer premium paying period at younger ages and throw in time value of money, actuarially there's not much ultimate cost difference between buying now or waiting.

So to me the principal reason to buy early is insurability. In that instance I usually prefer that younger people (under 60) spend their resources on good investments and avoiding debt. Around 60ish we'll see how far they got, and decide on LTC insurance at that time. My sense is that most who did things right won't need it. But there are exceptions - for example, those over 60 who have not done things right and those who want it primarily to insure inheritance for their beneficiaries. And if they need it but can't qualify, then they also are likely to have bigger problems than LTC insurance.

-HW "Skip" Weldon Columbia, SC

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"HW "Skip" Weldon"

If they've done the right things in their lives, like staying fit, then they are more likely to live longer lives. This lowers the cost of health care throughout their lives, but longevity has its own "reward". A widow in her

90s, will likely need care, perhaps for several years. For most people, that care has a high probability of costing far more than any accumulated savings.

Elizabeth Richardson

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I've read lots of complains about LTC policies. More than half raise premiums, but this requires a special request to the state and the entire policy group is changed - not targeted individuals. Second, many havent paid out as advertised. They find gotchas, or stall knowing ill policy-holder have difficulty fighting it.

These are probably good if you have significant assets to pretect for immediate heirs liek a spouse. If you have less than $100K, then they arent worth the cost. if you have more than a couple million, they might also not be worth trouble because you can afford it. You arent goign to be spending that money on anything else by the time you need LTC. I plan on the latter.

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Even employer programs may not be great. I friends in our state's program which is outside of medicare. Their premiums doubled from $190 to $380 per month the past three years. If they move over to medicare, they are requie to pay all the Part B premiums which is $400, unless they had jobs for ten years in the social security system.

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They don't create these "gotchas" out of thin air. There are no exceptions that are not stated in the contract. The same is true for the rate hikes. As it is probably known, I don't sympathise with those that don't read what they are buying. LTC contracts are not written in impossible to decifer legalese.

As Cal wisely mentioned, the premiums can also be paid in advance to avoid the risk of rate increases.

I mostly agree with this. The rich can often "self-insure". The poor have no incentive to buy the coverage because medicaid will provide support (I take personal issue with paying the medical bills of others, but that's another topic). The people that most often find they need LTC are the "average Joes". They have a low 6-figure nest egg and a nice house to retire into, but couple of years in a decent long term care facility can wipe out the things they spent their life accumulating.

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It's a delicate balancing act as to where to allocate limited funds, I agree. And LTC is often not first on my financial planning list either.

However, I fear the unknown cost of future healthcare and changes in technology more than I do insurability. Healthcare costs are unquestionably spiraling out of control. Where the market will level out on this we can only speculate. In addition (and this is my big concern) we have no idea what future technology advances will bring. The ailments that killed us a decade ago, now only debilitate us. People now live with diseases far longer, and cures haven't been forthcoming. We haven't cured cancer, AIDS, heart disease, etc we only enabled patients to live longer with these diseases. Any change in average life expectancy, quality of life, and/or healthcare costs can throw the underlying pricing assumptions of LTC way out of equilibrium.

Future insurability is certainly a risk, but even the insurable may find LTC premiums unaffordable in the future if trends continue on thier current paths. A paid-up LTC policy mitigates that risk.

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Lexii are a good example...not many people own them because they can't afford them (or because they aren't German!) =) And they can only increase prices by what the market will bear. It's as if Fidelity has everyone in a Lexus, and says that Lexus can keep increasing prices 7% a year (for 20 years, despite the fact that few can afford that even today)...so look how much you need to save for car costs!

RE: "those with high insurance set pricing" - if that's true then it suggests insurance covers these costs...so why does the average couple still need $215k? The claim is that the average couple's out of pocket lifetime cost, after all insurance, requires $215k - which few people today have. Where is the money coming from for the bills of today's retirees? Pricing for over-65 health care is limited by available $.

Another Fidelity assumption in the 11/07 paper was that the health-care costs are evenly distributed through retirement. That's a valid point for things like insurance premiums and prescription drugs and preventive care. But IIRC if you're coming up with a figure for "average lifetime health care cost, age 65 through death" it's heavily weighted for terminal care, might look something like this:

$ $ $$ $ $$ $ $ $$$ $ $ $ $ $$$ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

From a time-value-of-money perspective that means a much smaller initial savings is required...and the amount might be equal to "the average equity in the median retiree home." So if a retiree today squirrels away Fidelity's suggested $215k for health care and lives off the rest...well, perhaps you live like a pauper, and leave behind an excess estate. And I don't know what happens to the ~90%? who don't retire with that kind of $ to begin with.

-Tad

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