Planning for Health Care Expenses

High on my retirement planning “to do” list has been to make a call on whether or not to get long-term care insurance. I have been procrastinating mightily on this one. So when I read an article outlining a new model for assessing health care costs in retirement (long-term care insurance is part of this equation) put together for Vanguard by Mercer Health Benefits, it pushed the issue back onto my regular “to do” list. Time is money, especially when considering long-term care insurance. The longer you wait, the more expensive it gets! More on that in a moment.

Everyone will have a unique set of circumstances that influence every aspect of this set of decisions. Using averages for lifetime healthcare costs and life expectancy is not helpful.   These are the components that The Mercer-Vanguard model considers:

• Health status and risk.
• Medicare coverage choice.
• Retirement age.
• Employer subsidies.
• Geography.
• Medicare surcharges.

Costs are presented on an annualized basis, which is much more useful for planning. In retirement you consider monthly/annual income streams, not lifetime.

Here are a few key things to remember when you plan for health care expenses after retirement.

• If you retire before 65 (when you can go on Medicare), remember that you will need to cover 100% of your health insurance premiums (any amounts previously subsidized by your employer as well as your current portion) until you hit 65.
• There are many options for (private) supplemental Medicare coverage that take some time to understand. You’ve probably seen ads for these plans. Make sure to find out if your employer will provide any of these supplemental plans for you in retirement.
• When making a decision on which supplemental plans to include, be sure to look at your personal projected out-of-pocket costs in addition to the premium. It might be worth paying a higher premium to limit your potential out-of-pocket exposure should you become seriously ill. (As a statistics nerd, I love their box and whisker charts for this one.)
• Costs for Medicare Parts B and D depend on your income.

If you are within ten years of retirement, I strongly suggest you actually read the 23-page document (first hyperlink). It is not a difficult read, and the graphical representations are very helpful. For a shorter version, you can read the PR Newswire summary.

Long-Term Care Insurance

The other major health related expense in retirement is long-term care (anything from in-home assistance to nursing home care). AARP published a very accessible piece explaining the two types of long-term care insurance and how they work. Half of the population will never need long-term care in their lifetimes, 25% will spend under $100,000 but 15% of the population will spend north of $250,000 on it. The Mercer-Vanguard Model gives excellent information to help you make a decision, including a breakdown of how long-term care expenses are covered. Here is another example from the paper on costs of different types of care.

My parents are 90 and almost 98 with round-the-clock, in-home care.  Long-term care is therefore something I need to think about. If you have a health condition or family members who have needed care, long-term care insurance may be something to consider. The traditional kind of insurance, like car insurance, term life insurance, and homeowners insurance, may never be used. You may feel that if you never use it, you have thrown your money away. Only eight percent of long-term care expenses are paid by insurance. Everyone else effectively “self-insures” as my parents do, using a combination of savings, Medicare, home equity, etc.  

There are far fewer companies offering traditional plans today as many companies in the past underestimated the costs involved in providing care and have gone under or stopped offering the plans. The plans that are offered now are also more expensive, (but there are discounts for couples!). If you decide to want this type of long-term care insurance, make sure you do research into the financial health of the company offering the plan. Make sure to understand any limitations or lifetime caps.

There is now a new type of long-term care insurance called “hybrid” long-term care insurance. It is more like whole life insurance. If you don’t have to use it, the “cash value” of the policy is paid to your heirs. The downside to these plans is that they are 3-4 times more expensive than traditional plans. You need to compare the terminal value of these plans to what you would get if you invested that money, and determine if the difference (the cost of the actual “insurance” component) is worth it for you.

What is the bottom line? The largest component of retirement planning is figuring out how much you are likely to be spending each year in retirement. Health care is an important line item in your retirement budget, so take some time to get it as close to right as you can.

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