Factoring Medical Costs into Retirement
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
According to the 2010 Wells Fargo Retirement Study conducted by Harris Interactive, Inc., health care costs are expected to have the highest impact on Americans’ ability to retire, ahead of inflation. Nearly half of middle-class Americans (47%) anticipates that the cost of health care will have a high impact on their ability to retire in the way they prefer. But do they have a good handle on what those costs will be?
This research suggests that the average American is grossly underestimating his or her total out-of-pocket costs for health care during retirement. Three separate independent studies concluded that a 65-year-old couple retiring in 2010 will need about $200,000 to cover their lifetime out-of-pocket medical costs in retirement. In contrast, middle-class Americans estimate on average that they will need only $32,000 to cover their health care expenses in retirement (median). Even when the higher mean (midpoint) estimates are considered ($89,000), Americans are still underestimating future health care costs by more than half.
For example, consider The Employee Benefit Research Institute’s recent projections regarding the amount that people who retire in 2018 will need to accumulate by age 65 to cover their health care costs:
A male currently age 55 will need to accumulate $187,000 to pay out-of-pocket expenses and premiums for Medigap coverage; a female age 55 will need to accumulate $213,000.
For a couple, both age 65 in 2018 and living to life expectancy, the needed figure is $271,000.
More importantly, many persons assume that costs will decrease as they get into their 80s and 90s. They also project that their spending will lessen later in retirement. But in reality health care costs will rise at about 6.3 percent annually over the next decade – a pace greater than the projected overall inflation rate.
So what are your options?
Medicare. Medicare is the primary health insurance provider for most Americans 65 and older. Medicare Part A (for which most people do not have to pay premiums) helps cover inpatient care in hospitals. Part B covers doctors’ visits (you do have to pay monthly premiums and copayments for this). Prescription coverage falls under Medicare Part D (you pay a monthly premium, a yearly deductible and a copayment or coinsurance for this coverage).
Medigap policies. Consider purchasing a Medigap policy, which pays deductibles, co-payments, and some other out-of-pocket costs associated with Medicare Part A and Part B. Across the insurance industry, there are 11 standardized Medigap policies named “A” through “N” (not every letter is used). This means the same policy can be compared across insurance providers based on premiums.
COBRA coverage. The Consolidated Omnibus Reconciliation Act (COBRA) is a federal law that requires most employers to offer former employees group health insurance for 18 months after termination of employment. Although group health coverage may be continued at group rates, continuing coverage under COBRA may be expensive. COBRA premiums can be up to 102% of the cost of coverage (102% of the employee cost plus employer cost) under the group health plan. If you elect to continue group health coverage under COBRA, it is important that you obtain other coverage as soon as possible after COBRA coverage ends to avoid a gap in coverage that could affect your future rights under federal law to obtain health insurance.
Long-term care insurance. No part of Medicare covers long-term care, not even Medicare Advantage (Part C). Medicaid, another government program, does cover long-term care. But Medicaid only helps persons with few financial resources. Moreover, Medigap insurance does not cover long-term care either. If you want insurance that helps pay for this expense, you need to buy a separate long-term care policy from an insurance company.
Talk to a Financial Advisor to review investment strategies designed to provide retirement income that can help you prepare for your future health care spending needs.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale .)