Successful Retirement Planning Must Include Healthcare Expenses

Posted on: July 17, 2016

July 17, 2016 — This is the first post in a four-part series exploring how the various generations are preparing for healthcare costs, starting with the plight of baby boomers headed toward retirement. Subsequent installments will reflect the challenges faced by Generation X and Generation Y (also known as Millennials).

A top concern for people of all ages is the fear of being unable to afford healthcare once they stop working, yet they fail to plan or budget for those costs. A 2016 Workplace Benefits Report by Bank of America Merrill Lynch provides insight into how employees are preparing for their financial futures.

Without question, strategic planning is crucial, and it’s the key difference between those who felt “very secure” or “not at all secure” about their preparation. Of those surveyed, 71 percent felt they have a firm idea of how much savings they’ll need for retirement. But based on their savings presumptions, the view may be overly optimistic, primarily because they don’t account for healthcare expenses. Singling out one particular age group now in retirement or on the precipice, have baby boomers adequately prepared for their twilight years?

According to the Insured Retirement Institute (IRI), there are 76 million baby boomers, more than 40 million of whom are already age 65 or older. They will retire at a rate of 10,000 per day through at least 2030, comprising 20 percent of the U.S. population. Only 24 percent of baby boomers are confident they will have enough savings to carry them through retirement, a sharp turnaround from the first few years following the plunging economy when confidence rose. Despite a generally healthy rise in home prices and the stock market, the decline in confidence suggests that many baby boomers perhaps missed out on any economic recovery.

Putting children through college and caring for aging parents while wages have remained stagnant have already begun to exhaust baby boomers’ limited financial resources. With consumers shouldering more of the burden for today’s healthcare costs, saving becomes even more difficult. In the 2016 Workplace Benefits Report, employees cited rising deductibles, co-pays and other costs as reasons they cannot save. The IRI report indicates that only 39 percent of baby boomers have tried to figure out how much they need to have saved for retirement. Of those who have, a third did not include healthcare costs in their calculations.

With rising life expectancy, baby boomers can face substantial healthcare expenses. Costs over the previous decade have risen at double the rate of inflation.(1) As fewer companies offer retiree health benefits and government-funded programs such as Medicare fall under pressure from tightening federal resources, the burden for paying for healthcare will fall increasingly on individuals.

Many retirees will have private insurance and then shift to Medicare. While Medicare provides some coverage for retirees, it doesn’t cover everything. After age 65, Medicare covers about half of an individual’s expected healthcare expenses.(2) Supplemental Medigap insurance can help cover the difference. But even with extra insurance, health care in retirement can be more costly than anticipated. Baby boomers will likely rely more on personal savings to meet expenses and fill the gaps.

How do those with little or no savings achieve a better future? IRI president and CEO Cathy Weatherford said, “Time is running out. Unless Boomers begin to focus on their long-term needs now and commit to savings, they will need to work longer and make steep cutbacks to make ends meet in retirement.”

For many, health will be the critical retirement wildcard. Accounting for medical and long-term care expenses is imperative. The challenge, of course, is unpredictability: Healthcare costs in retirement are not linear; they are dependent on individual health conditions and types of care required. Understanding the complexities of future expenses and changing strategies now can help baby boomers prepare for a secure retirement.
1. AARP Public Policy Institute. 2013. “The Effects of Rising Health Care Costs on Middle-Class Economic Security”

2. Centers for Medicare & Medicaid Services