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Health Care Costs are Impacting Retirement Preparations

The average 65-year-old couple who is retiring can now expect to pay more than $250,000 in health care expenses during the rest of their lives.

The real numbers may in fact be even higher. Fidelity Investments is projecting the cost to be as much as $275,000; up 70% from their initial estimate in 2002. Preparing for these potential expenses is a challenge when it comes to the big picture of retirement planning. (1)

Altering Individual’s Retirement Savings Strategies

How many people retire with a dedicated account or lump sum allocated to future health costs? The answer is very few. Most retirees do not specifically plan for these costs and end up paying these expenses from their income, Social Security benefits, and savings.

For older retirees, the financial burden is greater. According to one study from the Employee Benefit Research Institute, people aged 85 and older devote an average of 19% of their household expenses to health care, compared to 11% of household costs for those 65-74. (1) An average male retiring at age 66 today is projected to receive approximately $280,000 in Social Security benefits over the balance of his lifetime. That would cover the $275,000 in projected costs referenced above. Fidelity notes that the average workplace retirement plan balance for someone in their sixties is $123,000. Currently, that would only cover approximately one retiree’s projected health care costs. (1) Few retirees approach retirement with savings large enough to cover these high costs. Some may want to consider a Health Savings Account (HSA), which is routinely used in tandem with a high-deductible health plan (HDHP). Contributions are tax free to HSAs, and withdrawals are tax free when used for qualified medical expenses. Money in an HSA may also be invested, and the accounts feature tax-free growth. Current annual HSA contribution limits are $3,400 for individuals (with a $1,000 catch-up contribution allowed for those 55 and older) and $6,750 for families. (1,2)

The Impact on Employer Matching Contributions

While some households have begun adjusting their retirement expectations in light of projected health care expenses, businesses have also quietly made some changes.

A new study from employee benefits giant Willis Towers Watson says that company matches to retirement plan accounts decreased about 25% between 2001 and 2015 (from 9.1% of worker pay to 6.8% of worker pay). The reasoning appears to be that at least some of those dollars were shifted into health care benefits. In the same period, employer allocations to company health care programs more than doubled, rising from 5.7% to 11.5% of employee pay. (3)

Use Multiple Approaches to Prepare for Medical Expenses

Staying active and fit may lead to health care savings over the long run, but some baby boomers and Gen Xers already have physical ailments. Barring some sort of unusual economic phenomenon or public policy shift, the question of how to pay for hundreds of thousands of dollars of medical and drug expenses after 65 will confound many of us.


1 - [8/25/17]

2 - [8/24/17]

3 - [7/14/17]

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Your Financial Roadmap, Inc. is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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