Healthcare spending in retirement has already been a hot button financial issue for some time. But the Covid-19 pandemic has turned the healthcare industry on its head.
According to an article on healthcare publisher FierceHealthcare.com, PricewaterhouseCoopers says it's hard to tell what may be ahead for future healthcare spending. The professional services firm recently unveiled a new report on medical costs for employer-based health insurance plans, which had new some firsts.
For the first time ever in 13 years of doing this, PwC ran scenario-based analysis for its healthcare projections -- instead of a single overall projection for medical costs.
A Never-Before-Seen Situation for Healthcare Spending Forecasts
"This is an unprecedented report for us," Ben Igur, head of PwC's Health Research Institute told FierceHealthcare.com. "In the 13 years we have been doing this, we made a projection of the coming year and never felt the need to do scenarios."
For 2020, PricewaterhouseCoopers had estimated that the medical cost trend would increase 6% -- a healthcare cost projection that is close to estimates by other research groups, such as Fidelity and Health View Services.
What about its three scenarios for the future? Those range from 4% to 10% for 2021, depending on how much healthcare spending rebounds in the latter parts of 2020 and what future outlooks are.
PwC expects for a rebound later and in 2021. Now, what does this mean for you in retirement?
Healthcare, Retirement, and You
The uncertainty of future healthcare costs comes at a time when healthcare spending has been mostly on the rise and record millions of Americans are retiring. Waves of baby boomers joining the ranks of the newly retired introduces new demands on healthcare providers and Medicare, which then contribute to overall cost trends.
As for what healthcare costs might run retirees over the long run, Sarah O'Brien on CNBC wrote a piece on what it might cost you. According to O'Brien, Medicare covers approximately two-thirds of healthcare costs for its 62.4 million or so "beneficiaries."
"Depending on the specifics of your coverage and how often you use the healthcare system, your out-of-pocket costs could reach well into six-figure territory over the course of your retirement," she writes.
These numbers are based on a report by the Employee Benefit Research Institute. It estimates that out-of-pocket healthcare costs for men during retirement will equal approximately $130,000, while the cost for women will rise to $146,000.
Why Is There a Difference?
The discrepancy between the two genders is due primarily to their longer lifespans and propensity to take better care of themselves. But healthcare costs are expected to rise in general, regardless of how much they actually increase.
This also doesn't account for other health concerns like long-term care, which can bring their own cost pressures to bear.
What Can You Do to Plan for Healthcare in Retirement?
So, what can you do to plan for healthcare expenses so that they don’t detract too much of your income from your other areas of your lifestyle?
Include Healthcare Spending in Your Retirement Financial Plan
First of all, be sure to include forecasts for healthcare spending in your retirement plan. As you saw earlier, many reports and commentaries provide lump-sum estimates for healthcare spending over someone’s retirement lifespan.
But in many ways, it’s easier to plan for healthcare as an annual expense. Based on various research sources, once someone hits their mid-70s, their healthcare expenses usually begin to pick up considerably.
Estimating Retirement Income Needs in Your Plan
A rock-solid retirement income plan will have estimated numbers for monthly and annual spending as well as cash-flows.
Your financial professional can help you estimate what your health costs might look like on these bases, as well.
Liquidity is an important part of your financial strategy for retirement. As one part of your game-plan, you might consider having a dedicated bucket of liquid money for health expenses as they may arise.
Ask your financial professional about this strategy option as well as others to be outlined below.
In Pre-Retirement, Tap Health Savings Accounts
If you have some time before retirement, look at ways to fund a health savings account so you have dedicated funds for healthcare spending.
This is one of the best accounts available to retirement savers today. If you contribute money to an HSA, the contribution is tax-deductible. Also, your money grows tax-free while it's in the account.
If you use your withdrawn money for qualifying medical expenses, the withdrawal can also be tax-free, as well. However, to qualify for a health savings account, you must have a high-deductible health insurance plan.
Once you reach age 65, you become eligible for Medicare, which means you can't contribute to an HSA anymore. You also have the ability to transfer money from an IRA or employer plan into an HSA if you so choose.
Carefully Consider Medicare Options
If you are near age 65 or have reached that point, take a careful look at your Medicare coverage. What people choose for Medicare coverage can be one of the most important decisions they make about their retirement.
Certain plan choices that you make are locked in for the year once you have applied for it. So, it’s prudent to walk through all of your options with a financial advisor or agent who understand the ins-and-outs of Medicare well.
How Do Different Medicare Options Compare?
Yes, Medicare Advantage plans mean less money for premiums. But you are likely to shoulder more of your health costs out-of-pocket throughout your retirement.
By choosing a Medicare supplement plan, you will pay more for premiums. However, in exchange you can have some relief for your pocketbook. The health insurer will cover more of the lion's share of healthcare costs in exchange for those premium payments (which can mean less in out-of-pocket costs on your side).
No matter what, the direction you take for Medicare coverage should make sense for your financial picture. Your financial professional can help you weigh your options against your annual retirement cash-flow and how much income you will need for everything else, all relative to your healthcare needs.
Explore Other Insured Solutions for Cost Relief
Look into other how other insurance-based solutions can help take health cost burdens off your shoulders.
Many insurance solutions exist for risks like long-term care costs, from annuities and advanced life insurance products to asset-based long-term care policies. Your financial professional can help you determine this.
Receive Enhanced Income for Long-Term Care
One possibility is to look at asset-based annuities that can double or triple their payouts if you become incapacitated or need any form of long-term care.
While you enjoy this stepped-up income due to your changing health situation, many of these contracts provide this stepped-up income for a certain timespan. Check with your financial professional about the terms and timespans of any annuity contracts like this you may be exploring.
Pay for Care with Tax-Advantaged Proceeds
Another alternative is to buy a life insurance policy that has accelerated benefit riders. What is the benefit of these riders? They can pay you tax-free cash proceeds from the death benefit of the policy if you need long-term care.
These policies are becoming increasingly valuable as the cost of long-term care continues to skyrocket. What’s more, long-term care policies are also becoming correspondingly more expensive.
Why Are People Turning Away from Long-Term Care Insurance?
Long-term care insurance was considered the darling of the insurance industry back in the early nineties. But the huge cost of this service effectively forced many insurers to keep raising their premiums or else cancel their coverage.
Those who couldn’t afford to keep up with the cost of their policies were usually forced to let them lapse. In turn, that left them with nothing to show for what they paid. Then they had no form of long-term care insurance. For this reason, accelerated benefit riders were introduced into life insurance policies.
This isn’t to say there is no place for long-term care insurance in a retirement financial plan. Your financial advisor can walk you through these advantages and disadvantages of this insurance coverage as well as your other insured options.
What Is the Upside of These Life Insurance Policies?
That said, perhaps the greatest advantage that these life insurance policies can offer is the guaranteed payout that they give.
If you end up never needing to use any accelerated riders, then you still have the cash value and death benefit to fall back on. It’s therefore impossible to "lose" with these policies.
Plan for Your Financial Confidence in Retirement
Your financial professional can help you walk through these options and scenarios to see what might make sense for you. Consult with your financial advisor to see what other options may be available to help you cover your medical expenses during retirement.
What if you are looking for a financial professional to help with your retirement? Or perhaps you want another opinion of the existing plan you have in place for your healthcare spending and your retirement income in general.