Save For Health Care: It Costs More Than You Think
Special Report: Race To Retirement
However luxurious or entertaining your retirement is, one day you'll face this reality: Your body's aging, and you'll need health care.
A lot of Americans don't realize just how much they'll need. According to a survey of 1,700 retirees and near-retirees published in the American Journal of Law & Medicine last month, the average person's estimate of future out-of-pocket health spending is less than half of what it will cost.
The Long Haul
The study's authors, Allison Hoffman and Howell Jackson, say you should expect Medicare to cover only 60% of total health care expenses, and also anticipate a price increase of 7% a year.
That estimate doesn't include long-term care such as nursing and home health assistance, which more than half of seniors will need.
Financial advisers whom IBD spoke to said many of their clients are in a state of denial about this.
"No one wants to think about themselves in a nursing home," said Paul Markowich, a senior professional at Firstrust Financial Resources. "The real prime time to plan for long-term care is age 45 to 65, but that's the prime age of people not thinking about it."
Likewise, Kimberly Foss, president of Empyrion Wealth Management, says she was shocked to discover only 17 of her firm's 80 clients own long-term care insurance, the youngest of them age 68.
She also said it can be difficult to advise clients on whether to buy it, since premiums have increased so much and people may never use it.
Fortunately, other options are available. Insurers have begun offering hybrid products combining life insurance with long-term care insurance, which can make more sense financially.
Markowich points to products that draw money from your bank account into a fund that can alternately be used for long-term care, a death benefit or a 100% return of the premium. He also said a few annuity products, "besides offering a guaranteed income stream, pay you a bonus if you happen to have long-term care needs."
The Urban Institute figures a retiree's out-of-pocket health expenses are $5,000 to $14,000 a year. According to Hoffman and Jackson, three-quarters of that is divided between doctor visits and prescription drugs, with the remainder going to dental care and hospital visits. So 90% of seniors buy supplemental private insurance.
Markowich says a variety of Medigap plans have proliferated, and it pays for consumers to do their homework. He points to his parents, who recently left their plan with a reputable insurer after a year of research persuaded them that they could get the same benefits for only half the premium.
The planners also emphasize that you can never perfectly predict what your expenses will be. You don't know how long you'll live or what health problems you'll have. Then there's ObamaCare's rollout, bringing more uncertainty.
Robert Moffit, resident health care expert at the Heritage Foundation, says the fear of Medicare going bankrupt are, on one level, overblown. Yet that doesn't mean everything's OK. "There's no likelihood that it would actually go insolvent -- Congress would raise the payroll tax before that," he said. "What Congress might do is cut benefits to bring it into solvency."
Moffit says that by 2019, about 15% of health care providers that currently rely on Medicare will be running in the red -- meaning they will mostly go private or go under.
His advice to seniors is basic: "Save as much money as you possibly can, because the future of entitlements is very uncertain."