Retirement and healthcare costs

Healthcare costs continue to put financial pressure on retirees. Fidelity Investments annually conducts an estimate of future retiree health care costs. In their latest release, Fidelity estimates a 65-year-old couple with $75,000 in household income who retires this year should expect $10,476 in annual health care expenses and $240,000 over the course of their retirement. This represents a 4 percent increase from last year’s findings.

This calculation assumes the couple is subject to traditional Medicare Parts A, B and D and does not have any employee retirement health benefits through their former employers. It also does not incorporate the cost of nursing home care or dental costs.

How can you account for rising healthcare costs within your retirement planning? Here are several things to consider:

1) Account for higher costs in your planning. The first thing that you need to do is account for healthcare costs as a separate distinct expense in your retirement planning. The reason? Healthcare costs grow at a faster rate than most other expenses encountered during retirement. Over the course of the past 10 years, the inflation rate in the Fidelity study has been about 6 percent a year. If you are bundling your healthcare costs with other retirement expenses in your assumptions and not applying an appropriate inflation rate, you could be seriously underestimating your financial needs.

2) Reconsider the key financial planning pillars. There are four key financial pillars that tend to have the most power in financial planning. This is simply the amount you save, the amount you spend, the time that you give to accomplish a goal and the risk you take in your investment strategy. Rising healthcare costs all suggest that more pressure needs to be applied to these pillars.

The first element is saving and spending. These are pretty straightforward and work in tandem. Usually higher saving correlates with lower spending and you will need to remain disciplined in your discretionary spending once you stop saving and begin the distribution stage of your retirement cash flow strategy. As discussed above, this includes appropriately accounting for anticipated healthcare costs.

Time is an issue as well. The earlier you can save toward a goal, the more compound investing can influence the dollars you will have at retirement. Working longer helps, although many people retire early due to health issues. If you want to retire early, bear in mind it is becoming harder and harder to achieve. This is because pre-age 60 retirees have to flip for all healthcare costs without Medicare subsidies, they aren’t entitled to Social Security yet and early retirement means more years of drawing down on financial resources rather than building upon them. I find a year or two can be the difference between successful and unsuccessful retirement projections for the younger retiree. 

Finally, rising healthcare costs lend to a need to take higher risk in your investment strategy. When healthcare costs are rising at a 6 percent annual rate, it suggests that a portfolio with some element of growth will be required to keep up with expenses. Certificates of deposit, money market accounts and many parts of the bond world at current rates simply will not keep up. 

I discussed each of the above in a vacuum. However all of these pillars can be combined and worked in tandem in a way that best fits your needs and circumstances. The overriding theme is that more pressure will need to be applied on your planning and the basic options you have to accommodate healthcare costs if you haven’t accounted for those costs already.

3) Consider health savings accounts. If eligible, health savings accounts are the best of both worlds. Initially you get an upfront deduction for the contribution from your income taxes. If used for qualified healthcare costs, then any earnings from those accounts are tax-free.

Now this is great by itself, but if you have a long time horizon and can afford to pay medical expenses out of pocket at this time, I suggest not tapping into this account in the short term and invest the funds in higher risk/return assets. Over time the increased growth can better keep up and match with the medical costs later in life. Unfortunately I see a lot of people using the account to pay current medical bills even when they can pay out of pocket. In addition, most investors seem to have these accounts invested in some cash equivalent bank account paying very little in yield. With trending health care inflation at 6 percent, the purchasing power of these assets erodes over time and offsets the tax benefit if it isn’t invested properly.

4) Invest in healthy personal habits. Diet, exercise and preventative care all contribute to better health and lower medical costs. They don't guarantee health, but studies have shown they all increase the chance of living a healthier life. Over the past several years the financial planning world has not only focused on healthy financial habits, but also encouraging people to live healthier lifestyles due to the influence of these on healthcare costs.

Healthcare costs will continue put pressure on one's retirement plans. But these simple steps will make retirement more affordable in your later years.

Jeff Bogue is an independent, fee-only financial planner with his firm, Bogue Asset Management LLC, serving individuals, families and small business owners nationwide since 1997 with offices in Wells and Portland, Maine. Jeff has been a Certified Financial Planning Practitioner since 1997 and has been quoted on personal financial matters in the Wall Street Journal, Consumer Reports, Consumer Reports Money Advisor, Kiplinger’s Personal Finance,, The Portland Press Herald, AARP Magazine, Registered, Fidelity Stages Magazine, AOL Money & Finance, MSN/, Investment Advisor Magazine, Financial Planning Magazine and Financial Advisor Magazine. He is an active member of the National Association of Personal Financial Advisors, the Financial Planning Association and the Maine Estate Planning Council.