Dealing with higher medical costs as people live longer is a key question confronting retirement planning. That’s especially important since the trend is for lifespans to keep lengthening.
Ask Yourself This Question
“What was the key event of the 20th century?”
This question was asked by Leslie D. Michelson, chief executive of Private Health Management Inc., a Los Angeles healthcare consulting firm. And he put the question to a group of financial advisors.
They answered as most people might, with many world-shaping events, including advancements in aviation, the invention of the microchip, the internet, the cell phone, etc.
Michelson opined that the one event that most greatly impacts your life and your planning is the increase in life expectancy. Life expectancy in the Middle Ages in Europe was skewed by a high infant mortality rate, but few adults survived past age 45. Little progress was made even into the Industrial Age. A baby born in America in 1900 had a life expectancy of 48 years.
With advancements in medicine and medical technology, a child born in the U.S. today has a life expectancy of 78.7 years – a 60% increase in 100 years.
“Life expectancy at birth” assumes that mortality trends continue for the rest of the group’s life. Leading edge baby boomers born in 1946 had a life expectancy at birth of 63.6 years for males, 68.1 years for females. A median average assumes that half of those would die before the scheduled date, and half would live longer.
Fortunately for the boomers still around, life expectancy has increased. A male boomer turning 65 today has an additional 18+ years of life expectancy and a woman 20+ years. We expect half to live longer, half to die sooner.
Healthcare and Wealthcare
Given the potential for longer life, how do you plan for health-related expenses in retirement? How will your healthcare be delivered? More physicians are moving to concierge medicine, no longer the province of the super-rich. Here, you pay an annual fee for extra services. What this covers and how it works varies widely. Fees may be a doctor’s sole source of income, or the physician may take insurance, with fees supplementing income.
Fees at the lower end may be in the $1,200 to $1,800 annual range. For a family or retired person, that is an added cost. With boomers retiring and governmental mandates covering more people with insurance, plus entitlements like free annual screenings, demand for medical services will accelerate. The supply of physicians will not keep pace. Paraprofessionals, nurse practitioners and physician’s assistants will deliver many services.
ABC News and the American Association of Retired Persons teamed up to see how hard it is to shop for a new doctor. They found, by randomly calling 200 family physicians, that nearly 50% are not taking new Medicare patients. With Medicare and Medicaid squeezing doctors on reimbursements, this situation likely will get worse. Your healthcare expenses probably will be far larger than you imagine.
Healthcare Costs are Not Going Down
We may be headed toward a private pay option for those who can afford it and a public system for everyone else. The quality of your care and how quickly you get it may hinge on what you can afford. To pay for it, you may need to sacrifice elsewhere in your retired life.
Fidelity estimates that a couple age 65 retiring in 2016 needs $260,000 to cover medical expenses – that’s saved and after taxes. Medicare does not cover 100% of all medical costs, and the study includes what you must pay for.
The projection excludes expenses such as over-the-counter medications, most dental services and long-term care. Fidelity’s estimate was $160,000 in 2002, indicating a 62.5% increase in over 15 years.
The factors accelerating the spiraling health care costs are pretty clear. Taken directly from the Fidelity study, the challenges are:
- People are living longer – particularly women. A healthy 65-year-old woman alive today has a 25% chance of living to age 96, versus age 93 for a man
- Health care inflation continues to soar: 5.5% annually vs. less than 2% general inflation over the past year
- Although many Americans expect to work longer, the average retirement age is 62. Medicare does not begin for most until age 65
- While women are living longer than men, their savings are often lower. Men ages 65 to 69 have average retirement account balances of $191,000; women only about $117,000
- Where you retire matters; there can be big regional variations in health care cost and quality. For example, the cost of knee arthroscopy with ACL surgery for a retiree in New Hampshire is approximately one-third higher than the national average of $14,257
Wealthcare is Critical
Realistic estimates of healthcare costs in retirement are critical in investment choices leading up to retirement and in budgeting after you quit working. The challenge is compounded by low interest rates and rising inflation numbers.
Healthcare and Wealthcare are inextricably intertwined.
Talk to your financial advisor so that you can plan.