The numbers are staggering—10,000 baby boomers are entering retirement age every day and the pace will continue for the next 20 years, according to the Pew Research Center. The boomers are a powerful force representing over 75 million people, and as they enter their retirement years one of their primary financial concerns is how to pay for quality health care. Much of their anxiety is due to the rapid growth of health care expenses as compared to inflation. This has escalated the political debate on how to best fund, manage and deliver health care. Adding to the apprehension is the rising cost of employee benefits in general, having forced corporate America to drop defined-benefit retirement plans in favor of defined-contributions plans, elimination or dramatic reduction in retirement health care benefits, and increasing premiums. Bottom line: health care is extremely expensive, we are living longer, and 75 million baby boomers are starting to retire! There’s an obvious retirement income challenge and health care dilemma, and we should not expect Social Security and Medicare to cover it, because it won’t, and most Americans aren’t thinking about it or planning for it!
When you focus on health-care costs, it is important to consider inflation. In 2005, national health expenditures were $2 trillion, which is an increase of 6.9 from the prior year. That’s twice the rate of inflation and such spending is forecast to reach $4 trillion by 2015. According to the U.S. Bureau of Labor Statistics, over the last decade the annual growth of health care has been 8.3 percent compared to inflation of 2.6 percent, forcing households to consume their savings, borrow, or just do without. Based on a Fidelity Consulting Services study, Medicare out-of-pocket costs are projected to be $240,000 to $430,000 for a 65-year-old couple retiring today. However, the study notes that 55 percent of people surveyed have underestimated or don’t know what their medical costs will be in retirement. One reason people may underestimate the amount of money needed to cover their health care cost in retirement is that many workers don’t think they will ever need long-term care. Studies have found that 35 percent of those reaching 65 will use nursing home care at some point, however only one in 10 think they will need this type of care.
If you fail to realistically plan for your retirement health care expense, it may prove devastating to your finances and your golden years. Since there is a wide range in projected health care expenses, it is important to make sure you understand your options under Medicare and the various supplemental insurance offerings available, and to remember that long-term care is not covered under Medicare. The best way to analyze your probable health care expenses and overall retirement income needs is to work with a CFP or financial consultant who is competent in cash-flow financial planning, a multifaceted approach that projects your income needs and corresponding expenses many years into the future.
Dean J. Catino, CFP®, CPRC, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service investment and wealth management firm. Securities offered through LPL Financial. Member FINRA/SIPC. Monument Wealth Management has been featured in several national media sources over the past several years. Follow Dean and Monument Wealth Management on their blog Off The Wall , on Twitter at @MonumentWealth and @DeanJCatino, and on their Facebook page. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results. Strategies involving asset allocation and diversification do not ensure a profit or protect against a loss.