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Great Advice From Our Experts

Unexpected Health Care Expenses Can Drain Your Retirement Savings

September 8th, 2017

Life is a grand adventure. An adventure filled with surprises at every turn. However, not all surprises are good. As we get closer to our golden years, healthcare becomes one of the least pleasant of our surprises. Health care cost is the biggest problem retirees face today. Unexpected medical expenses can derail retirement plans if steps are not taken to mitigate the rising cost of health insurance and out-of-pocket medical bills.

The ability to pay for all health care services during retirement is critical and should be a major focus of attention. According to Fidelity Investments, a 65-year old couple retiree will need $240,000 to cover future medical costs. That does not include a long-term care or the costs you may incur should you decide to retire before your Medicare kicks in.

As people live longer into their 80s and 90s, they will likely need long-term care, vision or dental care, hearing aids or private-duty nursing — things traditional Medicare does not cover.

While Medicare can cover a short stay in a nursing home; the cost of long-term care can easily deplete your savings if your health deteriorates.

Here are few things you can do to better prepare and avoid the pitfalls of unexpected health care expenses:

Enroll in Medigap

Medigap can help pay for out-of-pocket medical expenses such as deductibles and copay that Original Medicare does not cover. These out-of-pocket expenses can easily add up to $4,000 on average a year.

To qualify for Medigap, you need to enroll in Medicare Part A and Part B. Note that you have to pay a premium in addition to what you already pay for Medicare Part B. Premium varies by region, but you can expect to pay up to $140 per month on average.

Some Medigap policies also cover foreign travel emergency and guaranteed renewal even if you get sick. But keep in mind that Medigap does not cover long-term care and other services.

Long-term care Insurance

One of the more expensive sides of health care is when it comes to having someone by your side at all times. Long-term care insurance is designed to help cover costs of nursing-home care, assisted-living facility or at-home assistance — things traditional Medicare does not cover. Payouts from the policy will help pay for some of the health care costs you may incur if you can no longer perform some daily tasks such as feeding and bathing.

Long-term care does not come cheap. A private room in a nursing home can cost $92,378 a year; an average cost for in-home assistance is $46,332 in 2016.  Long-term care insurance can protect you from financial ruin in your later years.

Not everyone will need long-term care in their later years, but according to a study, a typical 65-year old has a 51% chance of needing supports and long-term care services at some points.

The allure of long-term care insurance is apparent, but it can be very expensive. According to Broker World Magazine, the annual premium of long-term care insurance has tripled over the past few years from $1,000 to $3,000. And that can easily double if you wait too long before you get a policy.

To get the most out of your health insurance, you have to ensure that you are insured before your health deteriorates.

Invest more in stock – but diversify

In the face of rising inflation, the best safety net against the high cost of health care is to invest in stock funds.

Most people nearing retirement age are nervous about putting more money into stock funds, their fear is well founded. But to keep up with the rising cost of health care, the best solution is to invest in a broad range of stocks as opposed to traditional safe-haven investments favored by most retirees.

Even though inflation has been relatively low in the recent year, as little as 3% inflation can drain your retirement nest egg. For example, an annual inflation of 3% over a 30-year period will reduce $100,000 retirement savings to just $41198.5. That can severely dent purchasing power and the ability to pay medical bills in retirement.

Don’t be too conservative with your investment portfolio, review your portfolio and change the mix to 70 % equities, 20% bonds, and 10 % cash if your risk tolerance allows for it.

Don’t retire early

Retiring too early gives you fewer working years to save. Even if you saved consistently through your career, there are other things to keep in mind. One reason to keep working until full retirement age is that most people’s highest-earning years are in their 50s and 60s. If you retire before the age of 65, you may need to pay for your own health insurance before Medicare kicks in.

Early retirement can affect your income and your ability to pay medical bills in retirement. For example, if you delay retirement from age 62 to 66, you can increase your nest egg substantially. Say your annual income is $60,000 and you save 15% of your income. If you have $500,000 at age 62 in your retirement savings account, and they achieve 5% growth, then your savings will grow to $648,000 at age 66. By delaying your retirement for just 4 years, you can grow your nest egg by 20% or more.

In conclusion, unexpected medical expenses can deplete your retirement savings very fast. You must take all measures to prevent it from happening. And that includes investing for growth, buying health insurance to supplement Medicare and staying in the workforce longer. We all have loved ones that want to spend as much time with us as possible, just as we do with them. The best way to make sure of  is to make sure that you’re taken care of in your health and your finances. It is not easy to handle everything life throws at you at once, and that’s what we at David Ortiz Advisors are here for. We believe there is nothing more important than security in your retirement, so that you can truly enjoy your golden years without the stresses that come with it. Contact us at David Ortiz Advisors now so that we can help you to Plan Smarter and Live Better.