Planning for Health Care in Your Retirement

Jill and I realize that few years remain while we’ll still be able to take a family vacation. Maeve, our oldest, is off to college in less than two years. The twins are not far behind. Plus, we like hanging out with our kids, even though they are teenagers with all the “attitudes” that brings. So, off we went cruising in the Caribbean.

I swore I would not set foot on a ship again, after four years at Massachusetts Maritime Academy and four years at sea afterward. It is funny how I always get outranked by my wife. Jill promised this would be different!

This past Monday while at sea, the kids went off to some kids’ club activity. Jill and I headed to the pool bar. While having a tropical adult beverage, we met a lovely couple from Scranton, Pennsylvania—Dan and Sarah.

Dan just turned 62. He is a partner in a consulting business that he started 30 years ago. Sarah, who is 60, does fundraising for nonprofits. They have two kids with kids of their own. The four of us hit it off immediately. We traded stories while we enjoyed our poolside libations.

Sarah said the cruise was the first vacation they’d taken in years. Dan explained they’d suffered a tragic family loss, one that had long-reaching consequences. Sarah’s mother passed at the age of 90. She passed peacefully and surrounded by her family, but her age and failing health required round-the-clock care.

Her extended convalescence in a nursing home was a much more significant cost than the family had budgeted. To pay for it, they went deep into their savings. Dan and Sarah were still digging out, and more than anything wanted to make sure they didn’t leave their children in the same situation.

Despite the setback, Dan and Sarah have planned well for their retirement, with a mixture of investments that will provide them with a steady income. But Dan and Sarah also have a significant gap in their post-retirement plan: What to do about long-term care, should they need it.

“It seems like such a gamble, even after what we went through with Sarah’s mom,” Dan said. “The premiums are ridiculous. I hate the idea of spending money every month for something we might not use.”

Sarah didn’t want to be unprotected.

Look, no surprise that healthcare costs are on the rise, and they’re not the only problem. Many investors don’t sufficiently account for the cost of health care in retirement years. Fidelity estimates that a couple only a few years older than Dan and Sarah who retire in 2017 will need $275,000 available to cover medical expenses during their retirement. That number has risen alarmingly in recent years: In 2014, it was $220,000. In 2016, it was $260,000.
Excluding or underestimating health care is one of the most dangerous mistakes you can make when planning for retirement because it’s going to be a big part of your expenses. And if it’s been a few years since you factored the cost of health care into your retirement plan, now’s the time to revisit your numbers.

Remember, folks: Forewarned is forearmed. A vital part of your retirement strategy is planning for medical care.

Medicare cushions the blow for people who qualify, but it’s hardly a panacea. Medicare, a federal benefit that covers more than 55 million Americans, provides coverage for doctor’s visits, hospital stays and other healthcare and prescription-related expenses—routine costs of health care.

Medicare Part A also provides coverage for short-term nursing home stays and limited amounts of home healthcare nursing or rehab following surgery. It can also attach steep daily copays—$150 or more per day. Medicare also comes with significant limitations. Medicare does not cover custodial care, for example. That’s the day-to-day help and assistance that many elders—like Sarah’s mother—need.

The fact of the matter is you’re probably going to need long-term care after you retire. The US Department of Health and Human Services estimates that 70 percent of 65-year-olds will require some form of long-term care during their retirement. What’s more, people are living longer in retirement than they used to, so you need to plan for longer, too.
Dan and Sarah had factored in the cost of medical expenses to their post-retirement budget, but that was years ago. Their own experience with Sarah’s mother had made them painfully aware that they’d underestimated, but the options they were familiar with left them wanting. I introduced Dan and Sarah to asset-based long-term care (LTC) insurance as a possible strategy.

In the traditional LTC insurance model, you pay a monthly premium to an insurance company, which underwrites a policy that you use to pay for those services. As Dan said, you’re paying for something you may never use.

Asset-based LTC insurance works differently: There’s one initial “premium”—the deposit. You have full access to your premium, and you can cancel the policy at any time. And when you do, all your money is refunded.

The terms of each asset-based LTC insurance plan are different and can vary depending on your age, what coverage you need, and insurance provider. Terms can include an elimination period when you’re still solely responsible for long-term care expenses. But such plans provide a wide range of services not covered by Medicare and do so without adding the burden of having to pay a monthly premium.

With so much uncertainty about the future of health care, it’s incumbent upon all of us to make sure we’re as prepared as we can be. Dan and Sarah had $100,000 currently sitting in cash. I suggested they convert that to an asset-based LTC. Based on Dan and Sarah’s age and health, the $100,000 may give them more than $300,000 of LTC coverage—the peace of mind they’re looking for.

I told Dan and Sarah that long-term care insurance is a complicated area, so it’s vitally important for you to do your research before you commit to it. To do so, make sure to consult with a financial professional who’s a qualified retirement specialist, not just one trying to push a product.

After Dan ordered the next fancy drink, I turned to Jill and said, “We didn’t do this at Mass Maritime. I can get used to this.”

Hey folks, be vigilant and stay alert, because you deserve more.

I hope you had a great Thanksgiving.


Jeff Cutter, CPA, PFS is President at Cutter Financial Group, LLC, with offices is Falmouth, Plymouth, and Mansfield. Cutter Financial Group provides private wealth and investment management advice incorporating low risk, low volatility financial strategies.  Jeff can be reached at jeff@www.cutter-copy.dev.

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