Plan on Spending 35% of Your Retirement Income on Healthcare

I've suggested that the biggest issue in retirement for many of us will be healthcare. Vanguard isn't saying that it's the biggest issue, but they sure are recognizing that it will be a major one. In fact, they predict that by the year 2030, 35% of retiree income will be spent on healthcare. Yikes!

Here are some of the scary details in Vanguard's article listed above:

Only a third of large employers offered retiree health benefits in 2007, compared with two-thirds in 1988, according to the Kaiser Family Foundation.

Medicare covers only 51% of the typical person's medical expenses, according to a study by the Employee Benefit Research Institute.

In 2006, a 65-year-old couple with average life expectancy was projected to spend up to $295,000 on premiums and other health expenses out of pocket, the study found. Over a 30-year period, the couple could end up paying up to $550,000.

Long-term care can also add to your expenses. In 2006, the average nursing home cost $67,000 to $75,000 a year, according to the MetLife Mature Market Institute. And according to the U.S. Department of Health and Human Services, if you're 65 or older, there's a 40% chance you'll enter a nursing home at some point.

Vanguard also suggests a three-step process for dealing with healthcare costs during retirement:

• Understand your health insurance options.
• Select a plan that meets your needs.
• Prepare for rising costs.

Something's going to have to give -- most retirees simply can't spend 35% of their income on healthcare. They won't be able to make ends meet. So what's going to happen? Healthcare reform? Retirement redefined?

I'm not sure, but one thing that certainly seems in danger is the old financial "rule" that you need 70-80% of your pre-retirement income once you retire. I think it's currently more like 100%, but if healthcare costs keep rising at their current rate, the new norm could be 120%.

Comments

[Kevin]

So basically, get that mortgage paid off, because in retirement that money may be going towards health care. Wow.

[Ron@TheWisdomJournal]

So make sure you quit smoking, lose weight, get fit, and you'll hopefully be in better shape when you retire (financially and otherwise!) Yes, "better shape" was an intended pun.

What consistently amazes me is to see 65 year old people taking our 30 year loans for homes they cannot afford. Worse is to see them taking out 3 year ARM loans or buying a new Corvette.

We better ALL be considering long term care insurance, because very few will be able to afford health care before long.

[Kirk]

I agree with Kevin that we need to focus on preventative medicine. That is the major shift I see happening. It is much cheaper to join a gym and take vitamins than have a quadruple bypass.

Also, I don't put much credence on the Metlife statistic about nursing home care. They sell insurance so they want to scare folks into buying it. From objective sources I have seen, you only have a 20% chance of entering a nursing home. And those that do, only 20% stay longer than a year.

[Margo]

Why isn't anybody asking the question, why are we spending so much on end-of-life care? Nobody wants to think about letting grandma die, but what sense does it make to replace a hip/kidney/heart/etc for someone who's life is a vegetative state?

[Lord]

Little end of life care is spent on those however. Few elderly are up to an operation. Most of this is simply hospital visits trying to sustain them, fighting illness and disease.

[Margo]

Sure, but those hospital visits don't come cheap, and there's the enormous prescription cost to consider. My grandma, for example, takes so many pills with each meal, that she can't tell when she's dropped 1 or 5 - there might be as many as 30 pills taken at a time. We hear on the news about how 'seniors can't afford their medicine' but never "does it really make sense to keep doing this for someone who's lived a full life and isn't able to do so any longer"