by Chris Bixby, CFP®, EA
Senior Vice President
Portfolio and Wealth Management
Retirement. Just that word alone is so full of hope and promise. We spend our entire career saving and dreaming of the day when we finally reach retirement. The “golden years” are described as a time of leisure to enjoy postponed activities, deferred travel and generally more time to spend with family. As we plan for retirement, we also start to contemplate the reality of increasing healthcare expenses.
A survey found unexpected medical expenses at the top of worries many people face. This is compounded when news headlines trumpet how fast medical costs are rising. In the 1960s, approximately 5% of every dollar spent was allocated to healthcare; now, it’s closer to 18%. Several popular financial organizations annually proclaim how many hundreds of thousands of dollars a couple in average health needs to have already saved to pay for their expenses. The challenge of planning for medical expenses seems so acute that many in the financial services industry ignore the impact of potential medical expenses.
It is important we understand several factors that significantly impact how we can approach this topic and plan for the contingency of your medical expenses. These costs may be unknown, but they are not unpredictable.
Global Considerations
There are two significant challenges prevalent in the research presented by the financial services industry. The first is healthcare expenses will continue to rise at its historical rate. If medical expenses continued to rise at their historical rate, they would become greater than 50% of every dollar spent in this country. Several surveys of economists expect medical expenses will top out at around 25% of GDP, over that and economic productivity would be impaired.1 As a matter of note, the Obama-era healthcare legislation has contributed to a moderation of the increase in expense rates. While they are still going up, they are rising at a slower pace.
The second challenge is that medical expenses are not spent as a lump sum. Medical expenses occur over the course of a lifetime. They happen incrementally as you age and are impacted by longevity as well as personal health. This concept means a “total-cost approach” is a disservice to your medical expense planning. Should someone have a shorter retirement, they will likely spend significantly fewer dollars on healthcare. Should they live a long life, they will likely pay significantly higher medical expenses. How do average numbers apply to you? They don’t! You are a unique individual, and your medical expenses will have their own trajectory.
Personal Considerations
There are also personal considerations that affect your experience of medical expenses in retirement. The first factor to consider is your unique health situation. While this may seem obvious, many of the statistics that make headlines encompass the entire population. This includes people with cancer, congenital heart issues, smokers, the obese and unhoused. While they should all be considered, your personal experience may be substantially different. As we plan for your medical expenses, it is important to consider your family genetics and your personal health habits. Are you in good, average or poor health as compared to your peers? Do you have hereditary health conditions that make you more at risk than the general population?
Another factor to consider is your longevity. While this may seem to be related to your overall health, it is distinctly different. Healthy people pass away unexpectedly due to heredity and genetics. Many unhealthy people live for an extended period. Why does this matter? Because not only are medical costs increasing due to inflation, they are also increasing due to usage. The older you are the more healthcare expenses you incur. Understanding longevity as separate from your personal health helps to you better identify your potential healthcare path and provide better actuarial estimates of your future costs.
Planning Approach
So, how should you plan for medical expenses in retirement?
1. Identify the appropriate estimate of future healthcare inflation. At Ferguson Wellman we use research prepared by a leading actuarial company which is updated annually.
2. Communicate your relative health status to your portfolio manager. Your annual medical expenses can vary greatly based on your personal health history.
3. Use different mortality assumptions to test your plan, Consider the impact of living to age 97 as opposed to living to age 92, as an example.
Your Ferguson Wellman wealth management team uses robust tools that capture all these variables to help you incorporate medical expenses into your financial plan. We understand that we cannot predict medical costs, but we can create contingencies that help you to prepare for the reality of medical expenses in retirement. What’s next? Well, now you can enjoy your golden years with a sense of security knowing that you have a plan to pay for those upcoming expenses.
[1] Craig Palosky and Rakesh Singh, “A Polling Surprise? Americans Rank Unexpected Medical Bills at the Top of Family Budget Worries,” KFF, February 28, 2020.
[2] Robert Schmidt and Eric Walters, “Healthcare Costs in Retirement,” Milliman, Inc., March 23, 2021.
Ferguson Wellman and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.