Wednesday, March 3, 2010

Health Care Costs in Retirement

The Magic Question in financial planning: How much do I need to save for retirement?

Unfortunately there usually is not a simple answer. There are just too many variables.

However, medical costs are inevitably a big part of the equation. Some planners advocate long-term care insurance, but in my experience this insurance is often very expensive and sometimes has coverage limitations.

Still, it something worth thinking about, especially as this note from financial planner Robert Powell indicates:

Health-care costs in retirement are the third certainty in life

Time to kick the long-term-care insurance tires?

It’s one thing to know how the much the average 65-year-old couple free from chronic disease can expect to spend on health care in retirement. Those costs – not including nursing-home costs – average $197,000, but can exceed $311,000, according to a just-published report from the Center for Retirement Research at Boston College.

The harder part is getting a handle on the risks of incurring unusually high costs, especially nursing-home-care costs. Consider: At age 65, a typical married couple free of chronic disease can expect to spend $260,000 on remaining lifetime health-care costs – including nursing-home care. But there’s a 5% chance that health-care costs –including nursing-home care – will exceed $570,000, according to the report, which was underwritten by Prudential.

Not surprisingly, just 15% of households approaching retirement have accumulated that much in their nest egg.

So what should the average or not-so-average American do given the above? Save more? Invest more aggressively? Spend less? Draw down their nest egg more slowly? Work longer in a job that provides health care? Marry a rich widow or widower? Die sooner?

For its part, Prudential said that when people decide how much to save for retirement, and how rapidly to draw wealth during retirement, they need to consider the following:

- What risk they are prepared to accept of having their assets substantially depleted by health-care costs

- Whether they are above or below the average risk of incurring exceptionally high costs

- Whether they should insure against health-care costs by purchasing long-term care insurance.

The answers to those questions will go a long way to helping you decide how much to save for retirement or how much to draw down during retirement.

But there are some other facts and figures and probabilities to consider as well. For instance, the study noted that about one-third of individuals turning 65 in 2010 will need at least three months of nursing-home care, 24% will need more than a year, and 9% will need more than five years. In 2008, by the way, the annual cost of a nursing home was about $71,000 for a semi-private room and $79,000 for a private room, according to Prudential’s release.

Given those odds, and knowing that it’s hard to tell who will and who won’t need nursing-home care, it’s starting to look like long-term care insurance is worth - at a minimum - a look-see.

“In short, the main risk involved in assessing potential health-care costs is nursing-home care,” according to the Center for Retirement Research. “Incorporating these costs, households face a significant risk that could threaten their retirement security.”

Read the Center for Retirement Research report at this Web site.

Robert Powell is the editor of Retirement Weekly. Learn more about Retirement Weekly here .