The US healthcare system is probably one of the most complex in the world and costs have been rising dramatically throughout the past few years. In this month’s blog, I talk about how to age with financial grace in response to the many financial threats aging might bring.
First, according to an article from Fidelity investments in August of 2016, they show that an average couple past the age of 65 will spend about $260,000 on healthcare before they pass away. This includes Medicare premiums, copays, deductibles, prescriptions, and long term care insurance. Considering that the average American family from age 56-61 had only saved $17,000 for retirement (Money Magazine 9/2/2016 “Here’s how much the average American family has saved for retirement”), just the cost of healthcare would be devastating!
One aspect of that calculation that I find fascinating is that Fidelity has included long term care insurance as part of their estimate. In the article, they reference a report that claims that 7 in 10 Americans will need some form of long term care/nursing care before they pass away. The cost of long term care in retirement hits a strong cord with me as my father passed away from Parkinson’s disease. My mother took care of him at home for as long as she could, but he needed to enter into a nursing home in San Jose, CA. He had a semi-private room shared with 3 other beds and his annual cost of care quickly escalated to $120,000 a year.
So how can you battle these costs and head into retirement without fear of your biggest beneficiary being a healthcare provider? Most importantly, you need to plan for your retirement and save 20%-25% of your gross income per year. Consider that 30% of your pay goes to taxes, 20%-25% goes to savings, then that leaves 45%-50% of your pay to live from. That would be an ideal structure. It has been very rare in my 19 year career to come across a client that was saving at that level when they walked into my office for the first time. It is a goal and takes time achieve. For those people that have an employer that will provide a large pension income in retirement, this savings goal can be reduced. This can also be reduced if you have an employer that does a large matching contribution on your retirement plan. For example, I have a client where they put 8% in their 401(k) and the university they work at matches 11%, so that is 19% of their pay! The bottom line is that you need to have a financial plan in place and know how much money you need to have saved by the time you want to retire.
Second, everyone needs to have a discussion about the need for long term care and a plan in place should you ever need it. Going back to my father: If my father did not have long term care insurance (which I personally sold to him and my mother), then my parents retirement savings would have been drained paying for his care. My mother would have financially struggled the rest of her life as she was in good health. Thankfully, my mother was able to keep the family savings and she is now happily retired in California and traveling the world. I am a big believer in long term care insurance and many new insurance products are now in the market that can help offset the large cost of care besides traditional policies. I feel that the general population may have the wrong idea when they think about the potential cost of nursing homes and care. They seem to greatly underestimate the impact it could have on their loved ones that are healthy and don’t need care. I have personally witnessed a married couple run through over $2,000,000 paying for the cost of 24 hour home care leaving absolutely nothing behind except for a home with a little remaining equity.
If you would like to obtain an estimate for the cost of care in your area, I suggest you follow this link to Genworth’s annual Cost of Care survey. I find it is a strong ‘wake-up call’ when it comes to the potential cost of care as you can use the time slider at the top to get an estimate up to 30 years from today. For example, Genworth estimates the state median cost of a private nursing home room in Colorado will be $19,731 per month in the year 2046! Therefore, I suggest everyone speak with a qualified financial advisor who specializes in retirement planning to discuss the options when it comes to understand the options in regards to long term care.
Third, you should have a will and/or trust in place. This specifies how your money will be transferred should anything happen to you. Moreover, it allows you to protect your loved ones. If you were in a hospital bed and unconscious, is there someone that has a Power of Attorney to access your accounts and pay the bills? Is there a healthcare directive (Aka Living Will) that specifies your wishes to live under life support? A proper elder care attorney will provide all these documents and discuss these important topics with you. You can also protect your assets against probate attorneys in certain states that can lock up assets and charge high fees. California is an excellent example where probate attorneys can lock up homes for months and charge tens of thousands of dollars to put a property through the probate process. I have helped my clients fund more than 50 trusts in California due to this.
When you enter into retirement, you should have three things locked down: 1) A full financial plan that makes sure you understand where your income is going to come from to meet your lifestyle 2) a plan in place should you or your spouse face a long term care need and 3) a will and/or trust along with all the other estate planning documents. If you have all three, then you can freely head into retirement with complete financial grace! As always, I invite you to contact me directly if you need help with any of the above topics or if you have a financial subject matter that you would like me to write about!