2013-01-09 / Local & State


Factoring Medical Costs Into Retirement
By Wells Fargo Advisors

According to the 2010 Wells Fargo Retirement Study conducted by Harris Interactive Inc., healthcare costs are expected to have the highest impact on Americans’ ability to retire, ahead of inflation. Nearly half of middle-class Americans (47 percent) anticipate that the cost of healthcare will have a high impact on their ability to retire in the way they prefer. But do they have a good handle on what those costs will be?

This research suggests that the average American is grossly underestimating his or her total out-of-pocket costs for healthcare during retirement. Three separate independent studies concluded that a 65-year-old couple retiring in 2010 will need about $200,000 to cover their lifetime out-of-pocket medical costs in retirement. In contrast, middleclass Americans estimate on average that they will need only $32,000 to cover their healthcare expenses in retirement (median). Even when the higher mean (midpoint) estimates are considered ($89,000), Americans are still underestimating future healthcare costs by more than half.

For example, consider The Employee Benefit Research Institute’s recent projections regarding the amount that people who retire in 2018 will need to accumulate by age 65 to cover their healthcare costs:

A male currently age 55 will need to accumulate $187,000 to pay out-of-pocket expenses and premiums for Medigap coverage; a female age 55 will need to accumulate $213,000.

For a couple, both age 65 in 2018 and living to life expectancy, the needed figure is $271,000.

More importantly, many persons assume that costs will decrease as they get into their 80s and 90s. They also project that their spending will lessen later in retirement. but in reality healthcare costs will rise at about 6.3 percent annually over the next decade – a pace greater than the projected overall inflation rate.

So what are your options?

Medicare. Medicare is the primary health insurance provider for most Americans 65 an older. Medicare Part A (for which most people do not have to pay premiums) helps cover inpatient care in hospitals. Part B covers doctors’ visits. (You do have to pay monthly premiums and copayments for this.) Prescription coverage falls under Medicare Part D (you pay a monthly premium, a yearly deductible and a copayment or coinsurance for this coverage.)

Medigap policies. Consider purchasing a Medigap policy, which pays deductibles, co-payments, and some other out-of-pocket costs associated with Medicare Part A and Part B. Across the insurance industry, there are 11 standardized Medigap policies named “A” through “N” (not every letter is used). This means the same policy can be compared across insurance providers based on premiums.

COBRA coverage. The Consolidated Omnibus Reconcilation Act (COBRA) is a federal law that requires most employers to offer former employees group health insurance for 18 months after termination of employment. Although group health coverage may be continued at group rates, continuing coverage under COBRA may be expensive. COBRA premiums can be up to 102 percent of the cost of coverage (102 percent of the employee cost plus employer cost) under the group health plan. If you elect to continue group health coverage under COBRA, it is important that you obtain other coverage as soon as possible after COBRA coverage ends to avoid a gap in coverage that could affect your future rights under federal law to obtain health insurance.

Long-term care insurance. No part of Medicare covers long-term care, not even Medicare Advantage (Part C). Medicaid, another government program, does cover long-term care. But Medicaid only helps persons with few financial resources. Moreover, Medigap insurance does not cover longterm care either. If you want insurance that helps pay for this expense, you need to buy a separate long-term care policy from an insurance company.

Talk to a financial advisor to review investment strategies designed to provide retirement income that can help you prepare for your future healthcare spending needs.

This article was written by Wells Fargo Advisors and provided courtesy of Todd Alexander, The Alexander Financial Group in Mc- Connellsburg.

Investment products and services are offered through Wells Fargo Advisors Financ ial network LLC (WFAFFN), and Member SIPC. The Alexander Financial Group is a separate entity from WFAFFN.

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