While many retirees worry about the risks the financial markets pose to their lifestyle, the biggest long-term risk to their retirement security is the cost of health care.
Retirees should consider implementing a two-pronged strategy for health care: (1) a fiscal strategy to cover their potential health care costs, and (2) a physical strategy to reduce the odds of large health care bills.
Health care is a unique expense because the cost is essentially the same regardless of whether an individual has $200,000 or $2 million in assets. It is not like buying a car, where one could choose between a used Honda Civic or a new Mercedes.
We don’t have the ability to be frugal buyers of health care. If we need surgery, hospital care, prescription drugs or nursing home care, we have to pay for it, and the cost is about the same for everybody.
Thus retirees need to figure out how to cover health care costs and how to reduce the odds of incurring them.
From a financial standpoint, retirees can cover a portion of their health care costs by utilizing the Medicare system. But Medicare is not free. There are premiums for Part B (physician care), Part D (prescription drugs) and the Medicare Supplemental policy.
In general, a married couple should budget between $6,000 and $12,000 a year for premiums and ordinary out-of-pocket expenses. Using the traditional 4% to 5% distribution rate, this means a retired couple needs to dedicate about $225,000 in assets to cover the annual health care bills.
Medicare, however, does not cover the cost of long term care, which is the largest health care cost every retiree faces. These expenses can easily run from $60,000 to $80,000 a year. This means most retirees should consider LTC insurance.
Assume we have a retired couple with $100,000 of income from a combination of their investments and Social Security. While $100,000 may be comfortable, they face the possibility of an $80,000 LTC cost if one spouse becomes disabled. Therefore, they might consider an LTC policy that provides each spouse with $30,000 to $40,000 of annual benefits. The combination of the income from their investments, Social Security and the LTC benefits may be enough to support one spouse in a facility without bankrupting the other.
The financial planning, however, is only part of the equation. The second part is for retirees to consider seriously what they can physically do to reduce the likelihood of incurring large health care costs. While retirees can transfer some of the financial risk to others, they bear the entire physical risk themselves.
Many retirees could tell you something about the Standard & Poor’s 500 stock index, but most have probably never heard of sarcopenia. Yet sarcopenia is a bigger threat to their lifestyle than the stock market.
Sarcopenia is the medical term used to describe the condition of declining muscle mass. As we age, we lose muscle mass. Estimates are that by 70, men and women have lost about 30% to 40% of the muscle mass they had at 30.
The loss of muscle mass is a serious problem, as it contributes to a higher level of disability and incapacity as we age. The weaker we get, the more likely we are to get injured (broken hips come to mind). And the weaker we are when we get hurt, the less likely we are to recover. This raises the probability that we will need to pay for expensive long-term medical care as we age.
Doctors are beginning to understand more fully the link between physical exercise and disability later in life. There is growing evidence that we have more control over our ability to reduce the effects of aging than previously thought, if we are willing to put in the effort.
My dad, a retired physician, reminds me of how much harder he has to work at 72 to run the same distance that he ran at 42. Why? Because he has less muscle mass.
So he dedicates a good part of each day to exercising and combating the effects of aging. Instead of watching television, he is running and lifting weights. The stronger he is, the less likely he is to become disabled and incur large health care costs. This is one of the most positive things he can do to help preserve his lifestyle in retirement, in addition to paying his insurance premiums.
The cost of retiree health care is likely to be the biggest challenge we face as individuals and as a nation. Retirees need to confront the challenge by using both fiscal and physical strategies to reduce the odds that large health care costs will threaten their financial security.
