People nearing retirement underestimate their future medical expenses and still don't think they will have enough money to pay them. A new survey of people ages 50 to 64 by the Society of Actuaries (SOA) finds that only 7 percent of its survey group was "very confident" that it was saving enough money to handle healthcare retirement costs. Nine times as many—62 percent—were "not at all confident."
When asked what kind of annual healthcare cost inflation they could manage in the long term, 31 percent said they didn't know, while 43 percent said 1 percent or less and 25 percent answered either 3 percent or 5 percent. However, healthcare costs have been rising by substantially more than this amount. The SOA noted that a government forecast earlier this year pegged annual healthcare inflation at more than 6 percent for the rest of this decade.
While consumers may not be able to pinpoint exact healthcare expense numbers, it's clear they know that trouble awaits them. Asked how they would respond to continued healthcare inflation, 37 percent said they would try to stay healthy to minimize expenses, 35 percent said they'd try to just do the best they can, 31 percent said they'd save more money and cut non-healthcare spending, and 25 percent said they'd delay retirement. (Multiple responses were allowed, so the total exceeds 100 percent.)
"The overall theme in this study is that folks don't really have a good handle on dealing with the risks they will have in retirement," says Tonya Manning, a spokesperson for SOA and an actuary who specializes in retirement planning. "Our focus is on the risk that people have in retirement," she explains. "It's not just about preparing for the retirement you're planning, but planning for the retirement you're likely to have."
In a report last July, the SOA identified and explained these five post-retirement risks:
Outliving assets. At age 65, the average life expectancy is 17 years for American men and 20 years for women. Half of those who reach age 65 will survive even longer. Thirty percent of all women and almost 20 percent of men age 65 can expect to reach 90.
Loss of spouse. Because women have longer life expectancies than men and traditionally have been younger than their husbands, periods of widowhood of 15 years or more are not uncommon. For many women, the death of a spouse is accompanied by a decline in standard of living.
Decline in functional status. The cost of care as older people become frail may amount to $1 million or more for a couple over their lifetimes. Nursing home care costs may run $70,000 or more per person, per year. Care may be provided at home or in adult day care centers, assisted living facilities, or nursing homes.
Health care and medical expenses. A 2010 study estimates that health care costs for a retired couple (both age 65) could amount, on average, to $250,000 over their retirement. This figure does not include nursing home care costs or reflect health care reform legislation.
Inflation. Over the period 1980–2009, annual inflation in the U.S. for all items ranged from -0.4 percent to 8.9 percent, and has averaged 3.5 percent. For medical care, the annual average has been 5.8 percent.
You have to "have something in your bag of tricks to address these risks that you will face in retirement," Manning says. Even then, there is simply no way to avoid several basic uncertainties—how long you will live, how healthy you will be, and how big your lifetime health bill will be. "The only time you'll know exactly how much money you'll need in retirement is on the day you die," she says. "You can never completely insulate yourself from risk."
While backers of health reform say it will help bring down future cost increases in healthcare, there is little certainly about the legislation's lasting impact. Boosting people's access to health insurance—a major feature of the bill set to take full effect in 2014—may well raise costs in the short run. "Accessible healthcare does not mean affordable healthcare," Manning says.
And while the SOA can pinpoint healthcare retirement issues, finding solutions for many consumers is a much harder job. "I don't think a lot of people are in a position to make significant personal changes," Manning observes. "People don't like to hear it, but there aren't solutions for everyone who is out there."