This is a Barron's aritcle this Sat. A subscription is requried for the LINK.
Some excerpts.
Even retirees satisfied with Medicare’s coverage will still spend an average of $260,000 (per couple) on health care from age 65 on, according to Fidelity Investments. About a third of that is for Medicare premiums; the rest goes to co-payments, deductibles, and drug and medical costs. (For more on Medicare and what it covers, see “The ABDs (and Fs) of Medicare Coverage.”) A Kaiser Family Foundation report found that out-of-pocket expenses accelerate with age, with those 85 and older spending more than twice that of a younger beneficiary.
But affluent retirees especially may find health-care costs far exceed that estimated $260,000.
Chronic conditions, including dementia. Chronic conditions are costly. Having five or more chronic conditions—like diabetes, cancer, heart disease, or Parkinson’s—raised the median annual out-of-pocket expenses by 75%, according to Kaiser.
The grim truth is that people with multiple chronic conditions actually spend less on health care over the course of their lifetime, since they don’t live as long as their healthy counterparts. But while lifetime costs may be lower, they will spend more annually while alive. Specialty drugs can cost $100,000 or more for some chronic conditions.
Chronic conditions, including dementia. Chronic conditions are costly. Having five or more chronic conditions—like diabetes, cancer, heart disease, or Parkinson’s—raised the median annual out-of-pocket expenses by 75%, according to Kaiser.
The grim truth is that people with multiple chronic conditions actually spend less on health care over the course of their lifetime, since they don’t live as long as their healthy counterparts. But while lifetime costs may be lower, they will spend more annually while alive. Specialty drugs can cost $100,000 or more for some chronic conditions.
Long-term care. Long-term care is perhaps the biggest expense not covered by Medicare, and therefore insuring for it is one of the most highly debated financial decisions.
Costs vary widely depending on location. The median annual cost of a private room in a nursing home is $155,125 on Long Island, N.Y.; $182,318 in San Francisco; and almost $126,000 in Naples, Fla.—far pricier than the median $74,000 in the Dallas area. Sought-after facilities cost more.
Home-based care is vastly preferable for most people. But it can cost four times as much as assisted living, with the national average at $180,000 a year, according to HealthView. That’s on top of costs incurred to modify the home...
How to Pay for It All
All of these costs can add up to a sizable sum, but it’s not a lump sum, which makes it easier to manage. Starting early makes these costs easier to digest. For example, a healthy 55-year-old couple retiring at 65 needs to set aside $199,000 invested today, or $25,507 annually for the next decade assuming a 6% return, to cover health-care expenses, according to HealthView founder Ron Mastrogiovanni. That doesn’t include the surcharges and premiums for Medicare, which are directly deducted from Social Security and can result in a 30% haircut to benefits for more-affluent retirees. Nor does it include planning for long-term care.
Health savings accounts are often championed as a great way to save money for medical expenses before retirement because contributions go in tax-free, grow tax-free, and withdrawals are tax-free, no matter what your age, so long as the money is used for medical care. That triple-tax-free treatment is advantageous, but there are caveats. First, HSAs must be paired with a high-deductible health plan, which means you could incur higher health-care costs the years you’re contributing, and ideally those costs are paid with other funds. Because contributions have an annual limit—$3,400 for a single person; $6,750 for a family; those 55 and older can add another $1,000—it’s best to get started early and leave the money to compound tax-free for as long as possible.
HSAs are particularly useful for early retirees.
Of course the biggest cost is long-term care, especially for those who may have a family history of dementia. And here, advisors are split.
For retirees whose current income wouldn’t cover long-term care for three years, Morgan Stanley financial advisor Mary Deatherage recommends long-term care insurance with an inflation rider to cover the shortfall. She urges clients to buy in their 60s or early 70s.
Other advisors suggest converting life insurance policies with a cash value into a hybrid that can pay for long-term care. Another option for younger clients in their 40s: funding a deferred fixed annuity that can be tapped if long-term care costs arise.
Ultimately, the best way to deal with the uncertainty of health-care costs is flexibility.
