Health Care Costs: The Retirement Planning Wildcard

 Planning ahead for retirement income needs, we typically think about how much it will cost us to live day-to-day (food, clothing, shelter) and to do those things we want to do, like travel and helping grandkids pay for college.  The costs we don’t often think about, those that could potentially wreak havoc on retirement income planning, are health care costs.  According to an October 2012 article from the Employee Benefits Research Institute, an average 65 year-old couple will need $283,000 to have a 90% chance of having enough money to cover health care expenses over their remaining lifetimes (excluding long-term care).

Longevity is a critical factor driving health care costs.  According to the Social Security Administration’s 2020 study, for a couple, both 66 years of age, there is a 1 in 2 chance that one will live to age 90 and a 1 in 4 chance that one will live to age 95.  Add to these longevity statistics the fact that Medicare is now means-tested, so the more income you generate in retirement, the higher your Medicare premiums.

So, what can you do to proactively plan for this potential large retirement cost?

  1. If you plan to retire early, plan on the costs of self-insuring from retirement to age 65.  Some employer’s may offer retiree healthcare, or you can purchase insurance on the Health Insurance Exchange through the Affordable Care Act (these are still dollars out of your pocket in retirement).
  2. Consider taking advantage of Roth 401(k)s, Roth IRAs (if you qualify), or converting IRA dollars to ROTH IRAs in years that it makes sense from an income tax perspective.  This will give you tax-free dollars to use for potential retirement health care expenses that won’t increase your income for determining Medicare premiums in retirement.
  3. Work with your financial planner to determine if a vehicle like a non-qualified deferred annuity might make sense for a portion of your investment portfolio, again dollars that can be tax advantaged when determining Medicare premiums.
  4. Most importantly, work with your financial planner to simulate the need for future retirement income for health care expenses.  Although you will never know what your exact need will be, providing flexibility in your planning to accommodate for these expenses may help provide you confidence for future retirement.

Contact your financial planner to discuss how you can plan to pay for your retirement health care needs.

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.


Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are this of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Every investor’s situation is unique and you should consult with your financial advisor about your individual situation prior to making an investment decision. Please discuss any tax or legal matters with the appropriate professional. C14-005524