Considerations When Planning for Retirement: Unexpected Healthcare Expenses

retirement planning | Personal & Family Finances | InspireHer: Plancorp Women’s Initiative

 Susan Conrad By: Susan Conrad

I often tell people that I lived a Norman Rockwell childhood. My parents provided a home full of love and encouragement. Our grandparents lived nearby and most of our extended family lived within a 30-minute drive. We celebrated holidays, birthdays, and often gathered for no reason at all. As a child, I didn’t recognize that a significant benefit of this framework was that the entire family participated in caring for aging family members.

Today, I get it. The landscape of my family has changed, and we can no longer take for granted that our children will be available for our care. While my family still loves to gather as often as possible, my generation is geographically scattered. This creates significant challenges when faced with the care of family members like my mom. She now relies on others for day to day tasks that once may have been provided by a family member, such as assistance with groceries, prescription pickups and laundry. These expenses can quickly erode retirement benefits. 

When clients ask me how much they should save for retirement, I always say “It depends.” There are three primary factors to consider.  First, your mortgage. This cost is known.  Secondly, your travel – with some basic assumptions, this cost is knowable. However, the third and most commonly ignored factor is the cost of healthcare. We certainly know that costs are increasing, but the amounts we will pay in our retirement years are truly unknowable, and thinking through this obstacle can feel daunting. 

I have personally seen the challenges and cost of healthcare in retirement with my own mom. My father died almost 20 years ago. My mom has navigated retirement on her own with the support of our family.  Here are a few things we have learned.

Prescription costs are much higher than you might expect*.

Thanks to advances in healthcare, the survival rates for most illnesses are increasing.  Healthcare costs, however, continue to increase annually. The Senior Citizens League reports that the annual cost of living adjustment (COLA) increased Social Security benefits by 50 percent from 2000 to 2019.  However, during that same time period, out-of-pocket spending on prescription drugs rose more than five times faster – 253%.  Annual out-of-pocket spending on prescription drugs was the fastest rising expense of retirees in this time frame. 

Resources are often available to support aging-in-place (at home). 

The services available through home health agencies are expanding. Resources vary from state-to-state and a Care Consultant is often needed to help families identify options available in their area. The full suite of services needed to age-in-place might not be covered by Medicare or supplemental insurance policies. This leads retirees to agencies or private care with significant out-of-pocket costs that are often not considered when calculating the income needed throughout retirement.  

Transition care is often the next step. 

My mom lives in a rural area and does not have access to grocery and pharmacy delivery that we take for granted in urban areas. She wanted to remain self-sufficient, so she moved to an independent living community. This was both an emotional and financial decision.  About half of retirees will incur paid long-term care costs, including but not limited to: adult day care, homemaker services, home health aides, independent and assisted living facilities and skilled nursing home care. An independent living facility allowed my mom to balance her need for independence with assistance for tasks that are difficult or dangerous – but at a financial cost.  

Customizing the service level can be advantageous, but we cannot necessarily control our need for services, and of course costs increase as services expand. The cost for in-home health care varies based upon the services needed, cost of living adjustments and the length of time that care is provided each day.  The national median for assisted living cost is $4,000, while the average cost for private room nursing home care exceeds $8,000 per month. Baby Boomers are rightly concerned! Thirty-eight percent of Baby Boomers included in a Vanguard study listed health care costs as a top fear about retirement; even higher than fears of completely running out of money.

Planning for health care costs in retirement is extremely important. Remember, however, that the costs will be spread throughout retirement and that there is a “substitution effect.” Funds spent on travel in early retirement might be replaced or substituted by increased healthcare costs later in life. As with so many things, there is a balance, and a financial advisor can help you to determine what is right for you. 

Moving to an independent care community was a difficult decision for my mom and our family, but she found balance. She had to give up some independence, but she found community, and now has a group of women that meet for lunch and dinner every day. They often remain in the dining area after lunch until it’s almost time for dinner. As a daughter, I am grateful that she has new friends that have helped her adjust to her new home. I also know that the support and laughter they share will make them all happier and healthier. 

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*The annual cost of living adjustment (COLA) increased Social Security benefits by 50 percent from 2000 to 2019 but out-of-pocket spending on prescription drugs rose more than five times fast – 253%.
This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results.  Diversification does not ensure a profit or guarantee against a loss.  You should consult your own tax, legal and accounting advisors.

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Susan has more than 25 years’ experience in the pension and retirement space, including 20 years at First Mercantile Trust (now a member of the MassMutual Financial Group). Her tenure at the firm armed her with a thorough understanding of the dollars and cents side of corporate retirement planning and importance of plan design. More »