Saturday, October 6, 2012

Don't Forget Health Care Costs

I retired about seven years ago with meticulous financial plans. The bad news is that I have already encountered huge bumps in the financial road that no one could have foreseen and the good news is that I am somehow miraculously still on plan.

Thankfully, I did foresee that there were huge risks I would not be able to foresee and I planned for that by building lots of safety margin into my plan.

Someone once told me that there are known unknown risks (things that you know you don't know) and unknown unknown risks (what you don't know and don't know that you don't know) and it's always the unknown unknowns that get you. If that makes sense to you, then retirement planning will be a breeze.

A 56% decline in the stock market three years after I retired was the worst-case scenario and I got to experience it. (Word to the wise: my savings survived because I had a very heavy dose of bonds and cash.) Many weren't so lucky. Then one of my kids decided to become a doctor and got into med school. Didn't see that one coming.

Perhaps the biggest shock, though, has been the cost of health care. It's higher for me because I'm retired but have three kids in college, but I did foresee that.

According to a report in the New York Times today entitled Planning for Retirement? Don’t Forget Health Care Costs, for a 65-year-old couple retiring this year, the cost of health care in retirement will be $240,000 and that number is growing rapidly. That's about three times the median value of a 401(k) account for households approaching retirement. In other words, it's three times as much as most households have saved to pay for all retirement expenses.

The first problem with health care after retiring is simply finding someone who will insure you at a reasonable rate, or at an unreasonable rate for that matter. With a lot of research and a little finagling  I found policies for the five of us, but found the best approach was to get different policies from different carriers for each family member.

(Anyone who thinks they can get a voucher from the U.S. government and find someone to sell them health insurance after the age of 50 clearly doesn't understand the situation.)

When you reach age 65 you will be eligible for Medicare (at least I hope we will). That will be a huge help but it doesn't solve the problem. We tend to imagine that Medicare coverage will be similar to what we received from our employers, but it is not. According to the Employee Benefit Research Institute, Medicare covers only 51% of all medical services. Most households buy Medigap policies to cover the shortfall and that cost needs to  be built into your budget.

The Times article quotes a financial expert as recommending that you budget 5% of you income for health care costs, but that seems optimistic to me.

More details are available in the Times article. I will simply say that health care costs are a major risk to your retirement finances and often fall into the category of unknown unknowns from several perspectives.

The availability of health insurance, if your employer provide it, is another financial benefit of delaying retirement.

Estimate your retirement health care costs as best you can. And build in a lot of safety margin.


  1. Is it anywhere written in grimy detail, how much it costs for Medicare, all Medigap, max copays etc etc after we all turn 65? Ive searched for that and cant seem to find it



  2. I have found one of the better resources to be the NOLO book, "Social Security, Medicare & Government Pensions", by Matthews and Matthews.