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Carla Fried: Retiree health care – Don’t ‘lump-sum’ yourself into a panic

Thinking of costs in monthly increments makes them seem more manageable.  (Tribune News Service)
Thinking of costs in monthly increments makes them seem more manageable. (Tribune News Service)
By Carla Fried

Expect to have cable TV in your home throughout retirement? That’s a lump-sum cost of $86,000, says T. Rowe Price, which sounds shockingly high, right?

How about $150 a month, assuming an annualized 3% inflation rate over 30 years? More reasonable, yes?

So let’s apply that same point of view – monthly or annual expenses, not lump sum – to what’s often the most frightening calculation when planning for retirement: out-of-pocket, or OOP, health care costs.

Even with Medicare coverage, retirees are on the hook for a sizable chunk of their later-life health care expenses.

For a 65-year-old couple this year, the well-respected Employee Benefit Research Institute, EBRI, estimates they will need around – here comes the spooky lump sum – $325,000 to have high confidence they will be able to cover their OOP expenses, assuming they have median prescription drug costs. For a single 65-year-old male, the estimated cost is $130,000. For a single woman, it’s $146,000.

Not exactly pocket change. And those sums don’t include the potential cost of long-term care.

But what often gets overlooked is that those estimates are the total all-in for an entire retirement. The official life expectancy tables used by the Social Security Administration show that half of today’s 65-year-old men will still be alive at 83. Half of today’s 65-year-old women will still be alive at 85.

In a recent pitch for health care cost perspective, money management firm T. Rowe Price converted those big scary lump sums into a monthly or annualized expense over 15, 20 or more years.

T. Rowe Price did some number crunching on what the annual OOP costs today are for a retiree who has Original Medicare with a Part D prescription drug plan and a Medigap policy, or has an HMO Medicare Advantage plan with prescription drug coverage.

For individuals who fall into the highest-cost tier (higher premiums and OOP costs) the estimated annual cost in 2020 was $3,800 for someone enrolled in Medicare Advantage and $4,600 for someone with Original Medicare and supplemental drug and Medigap coverage.

That’s clearly going to be a noticeable line item in a retirement budget. But is it a budget buster? Let’s round up for a married couple and assume they have an annual cost of $10,000 this year.

The average annual Social Security benefit is around $18,000 this year. If one spouse never worked, the maximum spousal benefit would be 50%, so all-in Social Security income might be around $27,000 a year.

OK, spending more than one-third of pretax Social Security income on health care is insane. Agreed. That said, it’s likely that a household with high health care premiums (Medicare Part B premiums are based on income and higher income enrollees pay more for Medicare Part D prescription drug insurance) would be collecting more than the average Social Security benefit.

If we focus on the average annual OOP cost in T. Rowe Price’s analysis – it’s no more than $1,000 per person – the $2,000 for a married couple that is collecting a $27,000 Social Security benefit begins to look a bit more doable. Right?

And that’s just based on Social Security income. If you’ve managed to save for retirement – and perhaps have a pension – you obviously will have additional income.

That said, an important shortcoming of those estimates is that they specifically exclude the cost of long-term care, which is not covered by Medicare. Again, some clear-eyed perspective may help here.

Perhaps you’re familiar with the 70% factoid that is trotted out every time this issue is being addressed. It states that an estimated 70% of people who make it to 65 will eventually have severe long-term care needs before they die.

The source is impeccable: It was prepared by the nonpartisan Urban Institute and issued by the U.S. Department of Health and Human Services. But important context in that same report is often not included when the 70% figure is used.

For starters: Care is often provided by family members. That is a double-edged sword. While having family as caretaker is not a drain on the retiree’s budget, it can be a severe drain on family. Spouses doing the caregiving (often women) face physical and emotional challenges. And when adult children step in, it can often impact their financial security:

But from a retirement-budgeting perspective, the HHS report estimates that less than half of people over 65 who develop a severe need for support pay for that help. And less than one in five needs paid care for more than two years. As for landing in a nursing home? That is not the norm, and even when it happens only 15% of people spend more than two years in a nursing home.

A reasonable takeaway is that there’s a high probability that if you live a long life you will need help, but the time period you might need paid care is likely to be a few years. Not your entire retirement.

The BlackRock Retirement Institute, in conjunction with EBRI, took a look at OOP expenses in the last two years of life. It estimates that someone who died between the age of 80 and 85 and had extreme OOP expenses spent $55,000. Someone who died between 70 and 75 and had extreme late-life OOP expenses, spent half that much. Those who died after age 95 and had extreme OOP costs spent $86,000.

If all the scary headlines have you socking away a multiple of those sums for later-life, well, maybe that needs a rethink.

This is where a certified financial planner can be a smart investment. Crunching the numbers – and planning for medical cost inflation – based on realistic expectations will give you a more clear-eyed picture. It may help to break the planning into two pieces: annual OOP for the majority of your retirement, and a stash to cover potential end-of-life expenses. For much of your retirement, it’s likely that your premiums and copays can be covered from your annual sources of retirement income.

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