In this month’s edition of “Money Matters,” Scott talks about healthcare costs in retirement, health savings accounts (HSAs), extended care insurance, and other health-related costs that commonly occur in the golden years. He offers financial strategies designed to prepare for such costs, so your retirement savings aren’t hurt by unexpected healthcare costs.

For more information about how you can use HSAs to your financial advantage in retirement, check out my more in-depth approach to HSAs.

Money Matters: Healthcare Costs in Retirement Transcript

0:00:00.2 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor, he works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals, and Scott is joining us now by phone. Welcome, Scott.

0:00:25.8 Scott: Good morning, CJ.

0:00:26.6 CJ: Good morning to you. So, you thought we should talk about healthcare costs in retirement, can you give us a little overview of that situation?

0:00:36.0 Scott: Yes, in that, CJ, this is a really big topic and there's so much we could talk about, I think we're barely going to scratch the surface, but hopefully give people a few ideas of things to think about and very importantly, everyone's situation is different and it's very complex, so it's just a general discussion. Listeners, I encourage you to seek your own expert advice and spend some time and really do your own research, but, CJ now we've had many conversations, we've talked about market ups and downs and recessions and inflation and tax planning, and many of these things that are concern for investors and concerns for retirement, but one that we haven't really talked about that is a major factor is healthcare cost and retirement. And the things you look at, healthcare costs have out-paced inflation and wages for many years, and I'm almost hesitant in floating them out there, but there's various studies showing that for a couple that's at retirement age, their total costs spent on healthcare over the course of the retirement can be hundreds of thousands of dollars, so... It is a huge issue and a big part of the challenge, CJ, is that these expenses, they're largely unpredictable, it's not consistent, you don't know when they're going to occur and how severe it's going to be.

0:01:54.9 Scott: And one of the things that I've had people, as I've discussed this with clients over the years, some wonderful people and say, "Well, they're fit and they eat healthy, and they work out." There's this real sad irony that healthy people are likely to live longer, and their total cost may actually be higher, simply by living longer, and so, it's a... I saw one study from Healthview Services said that a 55-year-old healthy male can expect to spend about $223,000 in lifetime healthcare cost, but if you compare that to a diabetic 55-year-old male, it would be half, $116,000. So, it's a tough situation, and we look at things like Medicare, Medicare trust fund is projected to go to zero in just three years, so we may have increasing costs there. And the Medicare Part A, your hospital insurance, there's no premium, but it's important for people to understand that part B, part D supplements can have a considerable premium, it can cost folks several thousand dollars a year out of their retirement budget to pay for those. So, like other expenses in retirement, planning can make a difference looking ahead, but healthcare expense and thinking about that should really be a critical component of your long-term planning.

0:03:19.4 CJ: Well, what can we do about that, how can we plan adequately for that eventuality?

0:03:27.1 Scott: Yeah, there's a few things I like to think about, first of all, it's a contradict what I said a moment ago, I do think trying to keep yourself very healthy and fit is an obvious answer, even though you may live longer and longer expenses, hopefully have a higher quality of life and not experience really tough situations and expenses early in your retirement. But beyond that in terms of the numbers on paper and the financial planning side of things, just generally good sound financial planning can help a lot. Health savings accounts are an interesting tool that's open to some folks that maybe touch on for a moment, and then there are various types of long-term care insurance that may make sense for some people. On that first point, just good financial planning, basically thinking about, "Are you saving enough for retirement and budgeting this in as your accumulation phase?" And when you're at that point, when you're reaching retirement or you're at retirement, very critical to think about, "Looking at the resources that you have, how much can you spend out of your savings, out of your investments, out of your overall resources, and what's the sustainable rate in factoring in potential healthcare expenses for that?"

0:04:45.7 Scott: So that would be a big one, just the actual savings and spending decision. But there's some other elements, too, like think on social security, you and I've talked about that before, and how powerful potentially delaying social security can be in terms of providing a larger benefit down the road. Converting some of your pre-tax retirement savings like IRAs or 401k, 403b savings, that you've accumulated during your working years to Roth IRA can help by lowering your income and retirement, which can help a bit on that Medicare premium, and you and I've talked about Roth IRA conversions in the past, as well. So, there are a few levers to pull like that that might help a bit, but the big one in terms of the financial planning is making sure we're aiming to save a significant amount and then look at your expenses and really factoring in that cost and budgeting for that in terms of how much you can spend.

0:05:45.8 CJ: So good financial planning is very, very helpful, but can you circle back to the health savings account, the HSAs that you had mentioned?

0:05:55.6 Scott: Yeah, so this is a really interesting type of account that's available to some people, and so in your working years, if you have what's called a high-deductible health plan, you can partner that up with what's called a health savings account or HSA, is what you hear thrown around a bit. And this is an account that was established about 20 years ago to allow people to save, to cover that large deductible on a high -deductible health plan, and it has some very powerful tax advantages. In fact, it's... We can say it's really the most tax-advantage type of plan out there, even compared to retirement plans, because you can make salary contributions or employers can make contributions that are pre-tax, or if you're paying for it after tax or making after-tax contributions, those are tax deductible. So, the money going into this type of HSA account is pre-tax.

0:06:50.3 Scott: You can have those dollars sitting in a savings account or they can actually be invested just like say in your retirement account or an IRA, and those earnings can accumulate tax-deferred. And then as long as you meet the requirements, the dollars can be withdrawn tax-free. So, it can really be triple tax-advantage and you can build up a substantial balance in these types of accounts, which can go a long way to help offsetting either the deductible in that health insurance or you can save receipts and accumulate a balance and reimburse yourself or take money out tax-free in the future when you're in retirement age. So, very, very, powerful type of account that you should look to see, if maybe this makes sense for you. And a lot of people it doesn't, they might have a really good traditional type of health insurance plan with a low deductible, that's fine. That works very well for some people in that case just to say, "Hey, save the extra money elsewhere," but the HSA, if you have it available, it's certainly something to look into.

0:07:54.4 CJ: Alright. So that's a good option. And what about long-term care insurance? Talk to us a bit about that.

0:08:03.7 Scott: Yeah. Long-term care insurance has been around for quite a while, CJ, and this is a complex decision, back to what I said upfront. This is one we really need to get some good guidance, do a very thoughtful job of shopping. Long-term care insurance is like other types of insurance where you pay a premium, and if you qualify to make a claim because you need care at home or in a nursing home or a long-term care facility, it can pay a benefit just very shortly. But there's a whole lot of different levers to pull in terms of the policy design in terms of waiting period before those benefits or the dollar amount of the benefits, or if they have an inflation rider or not. So, there's quite a bit of complexity in the policy and the traditional policies the industry has gone through a lot of change and a turmoil is fair to say.

0:08:57.5 Scott: And it's really been consolidated down where many of the companies, that used to issue these policies, were bought or sold or consolidated, and we're down to a much smaller number of carriers than there was in the past. One interesting thing that's come up, CJ, is this was a tough decision because you're saying, "Well, I'm paying a substantial amount of premium year over year over year, and I don't know if or when I'm ever going to collect benefits on this." So, it was a tough decision for a lot of pre-retirees or retirees to look at. There are now some different types of hybrid-type policies, you might call them, ones that look like a life insurance policy, where you pay a premium amount and if you pass away and you don't require long-term care cost, that benefit will be paid out to your beneficiaries.

0:09:45.0 Scott: But if you do, you might be able to access some of those dollars to offset your long-term care expenses. And there's the same thing with annuity-type contracts. So, I have to say insurance is very important, but I'm very guarded and cautious. We don't sell any insurance policies, we're a fee only, I think that's a nice way to be able to give independent look at coverage and work with a client and an agent. And the companies are very good at coming up with new products to sell, but I do think there's something interesting here with these new hybrid-type policies that warrants a look from consumers, if they're interested in this.

0:10:24.0 CJ: Okay. Wow. Anything else you'd like to share with us before we let you go, Scott?

0:10:31.7 Scott: Well, I think the big thing is just trying to raise some awareness here of this issue. So, as always, I know you archive this audio and I posted on my blog, scottoeth.com, and I'll have other resources there. But thinking about how much you're saving, how much you can safely spend, and looking at other types of tools that might be available like health savings accounts, potentially long-term care insurance. It's a big decision, it's one that is worth spending some time on as you think about your future.

0:11:01.5 CJ: Indeed. Well, thank you Scott, very, very much for this very timely topic for a lot of us, and we'll check in again with you next month for more Money Matters.

0:11:11.8 Scott: Great. Thank you, CJ.