PLanning for health care costs in retirement


S

stevedhoward

Hi All,

Newbie to the group. I am 41 and my wife is 40, both US citizens. I
am an extremely anal planner, and have finally gotten to the point
where I have pulled my head out of the sand and realize that we
*might* have health problems in retirement :) I have read a good bit
on Medicare and the different plans and medigap, etc.

My question is this:

If I want to ensure we are OK health care wise in retirement, is $10K
per year (in todays dollars, inflated at 8% per year) out of pocket a
decent estimate to use when planning for costs? Is it even realistic
to guess at a number like this?

As an aside, I have already considered long term care insurance, which
we plan to purchase in our mid 50's.

Thanks!

Steve

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R

rick++

If I want to ensure we are OK health care wise in retirement, is $10K
per year (in todays dollars, inflated at 8% per year) out of pocket a
decent estimate to use when planning for costs? Is it even realistic
to guess at a number like this?
Thats the "million dollar" question. First the out-of-pocket cap has
been inflating more like 15% a year since the early 1990s when there
was brief respite due to managed-care. There is annual inflation
8%-10%
plus age-cohort inflation (40% more each 5-year-group older).
A five-year doubling rate is unsustainable, with no clear solution in
sight.
For instance, your costs will increase by 30 times by the time you
reach
medicare age then.

Second medicare coverage may be crumbling.
Medicare never covered as much as your employer program.
It has a "list price" for Part A, B & D (doctor, hospital & drug) of
$900 a month in 2008, but the government pays $778 of that
with the retiree paying the rest. As part of the drug law,
"well off(*)" retirees will pay 50% of premiums, phased in over the
next several years. Plus the medicare premiums and co-pays
are inflating a high annual rate too.
Theres another medicare option Part C- the HMO option
wich sounds the cheapest to consumers. But a NY Times
eidtorial yesterday recommended termination. Plus hearings
in Congress this week are heading in the same direction.
Part C is too expensive and not availble in low-income neighborhoods
is the claim.

(*) "Well-off" is currently just top 7% of retirees. But the
definition intentionally
has no COLA adjustment, so will be top 50% by 2020.

Relentless medical inflation make the projections extremely grim.
Premium and co-pay costs will easily consume half of an early retirees
expenses in a decade or two if this keeps up. None of the
presidential
candidates is talking drastic reform - just some bands to get more
people
to buy insurance. I suggesrt a rule of thumb is to compute
what you need for non-medical costs and double it to be on the safe
side.

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D

Dave Dodson

If I want to ensure we are OK health care wise in retirement, is $10K
per year (in todays dollars, inflated at 8% per year) out of pocket a
decent estimate to use when planning for costs?  Is it even realistic
to guess at a number like this?
I googled "cost of health care in retirement" and quickly found the
following statement:

"According to a March 2006 study by Fidelity Investments, a retired
couple without employer-sponsored health insurance can expect to pay
$200,000 for out-of-pocket health care costs like premiums and co-
pays."

Further, at personal.fidelity.com/planning/retirement/
plan_overview.shtml.cvsr?refpr=rrc18, has a breakdown of estimated
healthcare expenses, and states, "Fidelity estimates that an average
65-year-old should plan for at least $551 monthly or $6,631 annually
in healthcare expenses."

Dave

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E

Elizabeth Richardson

I have pulled my head out of the sand and realize that we
*might* have health problems in retirement :) I have read a good bit
on Medicare and the different plans and medigap, etc.
I would lay odds that what you're reading now will not exist 20+ years from
now.
If I want to ensure we are OK health care wise in retirement,
Your costs might depend on what kind of health care *needs* you'll have in
retirement. Are there lifestyle changes you could make now to better protect
yourself now and in the future? That may be the best investment you can make
toward your retirement health care costs.

Elizabeth Richardson

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K

kastnna

As an aside, I have already considered long term care insurance, which
we plan to purchase in our mid 50's.
Why in your 50's?

LTC is about 50% more expensive at 55 than it is at 40 and that's in
today's dollars. The growing healthcare problems that others mentioned
drive the price of insurance up. If there are not drastic changes in
the healthcare industry, you could end up paying multiples of the
current rates.

What if health problems arise? They tend to show their surface right
about that time. A significant health problem can not only make you
uninsurable but also increase the likelihood of needing LTC. That's a
double whammy!

disclaimer: I sell LTC (that's not a solicitation) so take my advice
with a grain of salt. But unless budgeting is strict, you should
reconsider your long-term care plan.

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E

Elizabeth Richardson

kastnna said:
What if health problems arise? They tend to show their surface right
about that time. A significant health problem can not only make you
uninsurable but also increase the likelihood of needing LTC. That's a
double whammy!
Kastna, I think this is excellent advice. LTC insurance can be almost dirt
cheap at the ages of the OP. This couple has time to shop for a good policy
without feeling pressured to make a decision. Still, like you say, they
should buy when they are young and still insurable.

Elizabeth Richardson

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T

Tad Borek

Newbie to the group. I am 41 and my wife is 40, both US citizens. I
If I want to ensure we are OK health care wise in retirement, is $10K
per year (in todays dollars, inflated at 8% per year) out of pocket a
decent estimate to use when planning for costs? Is it even realistic
to guess at a number like this?
I don't think it's useful to project a cost like this 25+ years into the
future. An 8% growth rate over 25 years, in a world of 3% economic
growth, would mean health care had turned into about 55% of the US
economy by then (it was about 17% last year and if you inflate it at 8%
while the economy overall grows 3%, that's the result).

Perhaps that's the problem with that Fidelity claim (that in 2006 a 65
year old retiring couple needs ~$190k for health care). The median
retirement savings for the age 55-64 bracket was is in the $60k range
based on numerous studies including Fidelity's. So there is a serious
disconnect. If $190k is correct, only a few percent of the US population
will obtain adequate health care in retirement, because very few have so
much saved that they can reserve $190k for health care.

One interesting approach to the problem is an HSA and high-deductible
insurance. If you save money in the HSA each year and don't draw much,
the account builds, and you can invest the money in mutual funds. If you
were to keep it up through a couple decades, even with some costs paid
along the way, you'd have a sizable nest egg designated specifically for
medical expenses. You could use that to pay long-term care costs, or
purchase a LTC policy. The money is freed up for the savings because of
lower health insurance premiums during your working life. And it's all
pretax money, that is never taxed as long as your HSA distributions are
used for allowable expenses.

-Tad

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C

Cal

Kastna, I think this is excellent advice. LTC insurance can be almost dirt
cheap at the ages of the OP. This couple has time to shop for a good
policy without feeling pressured to make a decision. Still, like you say,
they should buy when they are young and still insurable.

Elizabeth Richardson

One piece of advice that I would like to offer.

Since the OP would be starting at a "younger age", with a reasonable
premium,
I would suggest that he examine the possibility of a "Ten Pay" contract.
Such a contract, with a good LTC provider, would ensure that the PREMIUMS
do NOT increase with time. Contract sold with a Ten Pay feature have a
LOCKED-IN
premium.............

Items to look for:

inflation rider
ALL inclusive coverage (Home, Assisted Living, Nursing)
"Bucket of Cash" concept (you buy a $ amount, use it for what ever
comes)

Cal Lester CLU

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D

Dave Dodson

Perhaps that's the problem with that Fidelity claim (that in 2006 a 65
year old retiring couple needs ~$190k for health care). The median
retirement savings for the age 55-64 bracket was is in the $60k range
based on numerous studies including Fidelity's. So there is a serious
disconnect. If $190k is correct, only a few percent of the US population
will obtain adequate health care in retirement, because very few have so
much saved that they can reserve $190k for health care.
Of course there is a huge disconnect. The saving rate is reported to
be negative. But just because most people will not properly prepare
for retirement doesn't mean that the cost estimate is worthless. I
suspect those who frequent this m.i.f-p are probably more connected
than the general public. They will regard such a number as a wake-up
call and plan for it.

Dave

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T

TB

Dave said:
Of course there is a huge disconnect. The saving rate is reported to
be negative. But just because most people will not properly prepare
for retirement doesn't mean that the cost estimate is worthless.

You're right, the point of the study is to show how far behind everyone
is. But these numbers are on their face unrealistic. They're assuming
that somehow health care providers will continue to put through big
annual cost increases, over a period of decades, even though the figures
show that very few of today's retirees can afford them. That fails econ
101, there's no money to sustain it - an extreme example - it would be
like projecting this year's increase in gas prices forward for 20 years.
Either pricing eases, or demand eases.

Fidelity's 11/07 paper on retirement predicts that an average 65 yr old
couple needs $215k in savings today, just for health care, excluding
prescription drugs and some other common costs. They assume 7% inflation
for 17 and 20 years (life expectancy of the couple), and 5% earnings on
the money, and costs evenly distributed throughout retirement.

How do you sell $215k of health care to people who only have $60k to
spend on all retirement expenses? And that 7% annual inflator, if
economic growth (GDP) is 3% annually, would leave health care
expenditures as 36% of the US economy in 20 years. The growth in costs
should collapse well before that, precisely because the money isn't
available to pay them.

-Tad

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D

Dave Dodson

You're right, the point of the study is to show how far behind everyone
is. But these numbers are on their face unrealistic. They're assuming
that somehow health care providers will continue to put through big
annual cost increases, over a period of decades, even though the figures
show that very few of today's retirees can afford them. That fails econ
101, there's no money to sustain it - an extreme example - it would be
like projecting this year's increase in gas prices forward for 20 years.
Either pricing eases, or demand eases.
That might be true if retirees were the only consumers of health care.
But they are not. Health care costs will continue to rise because the
American people demand the latest and best possible health care, and
there are plenty of people with insurance that will pay for it. As an
analogy, just because the majority of people can't afford a Lexus
(probably including many people who drive one) doesn't mean that the
price of Lexuses (Lexii??) won't increase every year. If you want a
Lexus, you have to have enough to pay for it. If you want the best
medical care, you will have to have enough to pay for it.

Dave

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E

Elle

In all seriousness and if only for peace of mind, in
addition to the other suggestions you might want to consider
investigating those countries with single payer, universal
health care. Specifically, find what would be necessary to
live there and receive this. As a U.S. citizen also in her
40s, and of decent means (knock on wood should my health
fail), this is something I am considering.

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E

Elle

Dave Dodson said:
Health care costs will continue to rise because the
American people demand the latest and best possible health
care,
From media reports over about the last five years, it's
pretty clear that Americans want the most possible services.
Whether those services labeled "health care" actually are
for the care of health is another issue, though. Time and
again, studies show that many medical procedures and courses
of treatments are known to be questionable and sometimes
detrimental, yet they continue to be prescribed.

If one wants to plan financially for health care costs, it
does pay to shop around and study on what the best bet is
for a course of treatment. Fortunately the resources for
doing this are better all the time. Not perfect, but better.
and there are plenty of people with insurance
that will pay for it.
I believe both patients and health care facilities are
increasingly revealed to be in the red. Hospitals are
shutting down in many areas, for one. Physicians are driven
out of practice in specialties such as Ob-Gyn. New med
school graduates haven't financial incentive to become
primary care physicians, so the shortage in this specialty
has been growing quickly in the last decade.

A little good news is that, yes, the market is working to
some extent, in that some of the healthiest and those
actually able to afford health insurance are refusing it.
This raises the costs for those less healthy and less able
to afford. Then more of those who are less healthy and
poorer drop their health insurance (or are dropped by their
insurers). They report to ERs etc. and are subsidized by
those who can afford to pay, one way or another. Spiraling
worsens. And so forth. Now, due to market action, health
care cost and access is a leading issue in U.S. politics.

I think there is a lot to some simple concepts like
"insurance won't work very well if only those in Category X
(tendency to be sick) have insurance." In auto insurance, I
thought it had become clear in many states that rates are
lower if all are required to have it. Until all are required
to have insurance, and even afterwards, I agree with E.
Richardson that preventive care must be a pillar of each
person's health cost planning. One does have control over
this. It may require some study, at times, to determine
which procedures actually are effective, but this study is a
good investment of time. Plus, as I have noted here before,
corporations like Safeway have provided much evidence that
requiring preventive medicine of its employees has a
dramatic effect on health costs.


======================================= MODERATOR'S COMMENT:
Posters to this thread should relate comments to general financial planning.

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H

HW \Skip\ Weldon

Kastna, I think this is excellent advice. LTC insurance can be almost dirt
cheap at the ages of the OP. This couple has time to shop for a good policy
without feeling pressured to make a decision. Still, like you say, they
should buy when they are young and still insurable.
Just to add spice to the excellent comments on this thread, here are
two admittedly contrarian thoughts on LTC insurance:

1. I've always considered LTC insurance to be like life insurance in
that if a person does the right things over their lifetime
(save/invest regularly, pay off/avoid debt, etc.), they outgrow their
need for both life and LTC insurance. (They'll be able to self-insure
with their assets.)

2. Buying life/LTC are also similar in that when buying either
coverage per unit costs of insurance are less at younger ages. But
when you adjust for a longer premium paying period at younger ages and
throw in time value of money, actuarially there's not much ultimate
cost difference between buying now or waiting.

So to me the principal reason to buy early is insurability. In that
instance I usually prefer that younger people (under 60) spend their
resources on good investments and avoiding debt. Around 60ish we'll
see how far they got, and decide on LTC insurance at that time. My
sense is that most who did things right won't need it. But there are
exceptions - for example, those over 60 who have not done things right
and those who want it primarily to insure inheritance for their
beneficiaries. And if they need it but can't qualify, then they also
are likely to have bigger problems than LTC insurance.






-HW "Skip" Weldon
Columbia, SC

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E

Elizabeth Richardson

"HW "Skip" Weldon"
1. I've always considered LTC insurance to be like life insurance in
that if a person does the right things over their lifetime
(save/invest regularly, pay off/avoid debt, etc.), they outgrow their
need for both life and LTC insurance. (They'll be able to self-insure
with their assets.)
If they've done the right things in their lives, like staying fit, then they
are more likely to live longer lives. This lowers the cost of health care
throughout their lives, but longevity has its own "reward". A widow in her
90s, will likely need care, perhaps for several years. For most people,
that care has a high probability of costing far more than any accumulated
savings.

Elizabeth Richardson

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R

rick++

I've read lots of complains about LTC policies. More than half raise
premiums,
but this requires a special request to the state and the entire policy
group
is changed - not targeted individuals.
Second, many havent paid out as advertised. They find gotchas, or
stall knowing
ill policy-holder have difficulty fighting it.

These are probably good if you have significant assets to pretect for
immediate heirs
liek a spouse. If you have less than $100K, then they arent worth the
cost.
if you have more than a couple million, they might also not be worth
trouble
because you can afford it. You arent goign to be spending that money
on anything
else by the time you need LTC. I plan on the latter.

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R

rick++

"According to a March 2006 study by Fidelity Investments, a retired
couple without employer-sponsored health insurance can expect to pay
$200,000 for out-of-pocket health care costs like premiums and co-
pays."
Even employer programs may not be great. I friends in our state's
program
which is outside of medicare. Their premiums doubled from
$190 to $380 per month the past three years. If they move over to
medicare, they are requie to pay all the Part B premiums which is
$400,
unless they had jobs for ten years in the social security system.

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K

kastnna

I've read lots of complains about LTC policies.  More than half raise
premiums,
but this requires a special request to the state and the entire policy
group
is changed - not targeted individuals.
Second, many havent paid out as advertised.  They find gotchas, or
stall knowing
ill policy-holder have difficulty fighting it.
They don't create these "gotchas" out of thin air. There are no
exceptions that are not stated in the contract. The same is true for
the rate hikes. As it is probably known, I don't sympathise with those
that don't read what they are buying. LTC contracts are not written in
impossible to decifer legalese.

As Cal wisely mentioned, the premiums can also be paid in advance to
avoid the risk of rate increases.
These are probably good if you have significant assets to pretect for
immediate heirs
liek a spouse.  If you have less than $100K, then they arent worth the
cost.
if you have more than a couple million, they might also not be worth
trouble
because you can afford it.  You arent goign to be spending that money
on anything
else by the time you need LTC.  I plan on the latter.
I mostly agree with this. The rich can often "self-insure". The poor
have no incentive to buy the coverage because medicaid will provide
support (I take personal issue with paying the medical bills of
others, but that's another topic). The people that most often find
they need LTC are the "average Joes". They have a low 6-figure nest
egg and a nice house to retire into, but couple of years in a decent
long term care facility can wipe out the things they spent their life
accumulating.

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K

kastnna

So to me the principal reason to buy early is insurability.  In that
instance I usually prefer that younger people (under 60) spend their
resources on good investments and avoiding debt.  Around 60ish we'll
see how far they got, and decide on LTC insurance at that time.  My
sense is that most who did things right won't need it.  But there are
exceptions - for example, those over 60 who have not done things right
and those who want it primarily to insure inheritance for their
beneficiaries.  And if they need it but can't qualify, then they also
are likely to have bigger problems than LTC insurance.
It's a delicate balancing act as to where to allocate limited funds, I
agree. And LTC is often not first on my financial planning list
either.

However, I fear the unknown cost of future healthcare and changes in
technology more than I do insurability. Healthcare costs are
unquestionably spiraling out of control. Where the market will level
out on this we can only speculate. In addition (and this is my big
concern) we have no idea what future technology advances will bring.
The ailments that killed us a decade ago, now only debilitate us.
People now live with diseases far longer, and cures haven't been
forthcoming. We haven't cured cancer, AIDS, heart disease, etc we only
enabled patients to live longer with these diseases. Any change in
average life expectancy, quality of life, and/or healthcare costs can
throw the underlying pricing assumptions of LTC way out of
equilibrium.

Future insurability is certainly a risk, but even the insurable may
find LTC premiums unaffordable in the future if trends continue on
thier current paths. A paid-up LTC policy mitigates that risk.

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T

Tad Borek

Dave said:
As an
analogy, just because the majority of people can't afford a Lexus
(probably including many people who drive one) doesn't mean that the
price of Lexuses (Lexii??) won't increase every year.
Lexii are a good example...not many people own them because they can't
afford them (or because they aren't German!) =) And they can only
increase prices by what the market will bear. It's as if Fidelity has
everyone in a Lexus, and says that Lexus can keep increasing prices 7% a
year (for 20 years, despite the fact that few can afford that even
today)...so look how much you need to save for car costs!

RE: "those with high insurance set pricing" - if that's true then it
suggests insurance covers these costs...so why does the average couple
still need $215k? The claim is that the average couple's out of pocket
lifetime cost, after all insurance, requires $215k - which few people
today have. Where is the money coming from for the bills of today's
retirees? Pricing for over-65 health care is limited by available $.

Another Fidelity assumption in the 11/07 paper was that the health-care
costs are evenly distributed through retirement. That's a valid point
for things like insurance premiums and prescription drugs and preventive
care. But IIRC if you're coming up with a figure for "average lifetime
health care cost, age 65 through death" it's heavily weighted for
terminal care, might look something like this:

$
$
$$
$ $$
$ $ $$$
$ $ $ $ $$$
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

From a time-value-of-money perspective that means a much smaller
initial savings is required...and the amount might be equal to "the
average equity in the median retiree home." So if a retiree today
squirrels away Fidelity's suggested $215k for health care and lives off
the rest...well, perhaps you live like a pauper, and leave behind an
excess estate. And I don't know what happens to the ~90%? who don't
retire with that kind of $ to begin with.

-Tad

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