April 22, 2019
One of the biggest threats to your retirement solvency may be the cost of health care and prescription drugs.
A study by West Health and Gallup shows that in the past 12 months, seniors have withdrawn an estimated $22 billion from their long-term savings for health-care-related expenses. The average amount people pulled out was $3,789.
The report, titled "The U.S. Healthcare Cost Crisis," included a nationally representative survey of more than 3,500 adults.
"Americans in large numbers are borrowing money, skipping treatments and cutting back on household expenses because of high costs, and a large percentage fear a major health event could bankrupt them," the report said.
Here are some key findings from the report.
— 10 percent of Americans 65 and older did not seek needed treatment in the past 12 months because of the cost of care.
— About 7 million seniors couldn't afford to pay for their prescribed medication in the past 12 months.
— Eighty percent of the prescriptions senior can't afford are used to treat somewhat serious or very serious health conditions.
— Ninety-two percent of seniors believe the cost of health care will not improve or will get worse.
But it's not just seniors who worry about the cost of their health care.
The report found that 45 percent of Americans are afraid they will have to file for bankruptcy protection if faced with a major health crisis. In the past year, Americans reported borrowing an estimated $88 billion to cover health-care costs, according to the West Health and Gallup report.
In a recent blog post, Fidelity Investments encourages people to consider how their budgets will be affected by rising medical and prescription expenses.
"Unlike your parents' generation, you won't likely have access to employer- or union-sponsored retiree health benefits," Fidelity says in the post. "So, health care costs will likely consume a larger portion of your retirement budget — and you need to plan for that."
There is, of course, Medicare, which is the federal health insurance program for those 65 and older. But there are gaps in coverage.
"Many people assume Medicare will cover all your health-care cost in retirement, but it doesn't," said Steve Feinschreiber, senior vice president of the Financial Solutions Group at Fidelity Investments. "We estimate that about 15 percent of the average retiree's annual expenses will be used for health-care-related expenses, including Medicare premiums and out-of-pocket expenses."
One way to help with health-care costs is to consider funding a tax-advantage health savings account (HSA), which allows individuals to save money tax-free to pay medical bills. Money deposited in HSAs is tax-deductible and grows tax-free.
"Think of an HSA as a 401(k) for your health care," wrote Washington Post reporter Thomas Heath.
Not everyone has access to an HSA, which has to be linked to a "qualified high-deductible health plan."
For more information on how HSAs work, read: Health savings accounts: What you need to know .
For help in figuring out health-care expenses in retirement, try AARP's Health Care Costs Calculator . You'll also get tips on minimizing costs.
After housing, health care is likely to be one of your biggest retirement expenses. Whether you're retired already or doing some pre-retirement planning — and you should be — don't forget to factor into your budget the increasing cost of health care.
Last week I asked: How did you feel after retiring? Was there a difficult adjustment period?
"I retired one year ago at age 62," wrote Brian Farrell of Damascus, Md . "I am loving it, and have never looked back. I had a good job I liked, doing work I felt was worthwhile, with great people. But it was time to move on, do new things, and enjoy the future. While working, I thought that in retirement I could spend about one day per week on each of the following: Home upkeep, yard work/gardening, church volunteer work, helping with my parents' finances, and recreation. And that is kind of how it has worked out. The day I retired our Pastor moved to a new church, so I have been blessed by the opportunity to become more involved at the church I love, serving as an Elder, helping on committees and activities and assisting in worship. I visit my parents once a week (very precious time, they are in their 90s), organized their finances, and when my dad passed away, I was able to devote the significant time required to be the executor of his estate. So, it has been fantastic! I have replaced the social network of employment with my church family and my blood family. I am quite busy, and definitely feel like I am contributing to important causes. I told one of my old work friends that I spent more time biking, exercising, reading for pleasure, doing yard work, and he said it sounded wonderful — like the summer when he was 14."
Heidi Pratt of Florida wrote: "I retired four years ago at age 67. I owned my own home and was able to pay off the mortgage with a small inheritance from my parents. I have only raves for retirement. The day after I retired I got in the car and drove 14 hours to my daughter's home in Virginia. I visited family and friends. I drove to Maine to visit a favorite cousin and we drove together to Canada sharing expenses. My favorite part of retirement: I make all the decisions every day. I get up when I want, I don't set appointments before 11 a.m. I drink my coffee and read the paper for an hour or two before starting the day. I watch movies late, I go to bed when I'm ready. I walk every day when the time is right. I make real food and eat proper meals. I have many friends and see them a lot. I have close relationships with my family. We get together often and plan trips together. Our children are close. I watch my health closely and keep active. I love being able to get up and walk out the door at a moment's notice. I am responsible to no one, have no pets, and total freedom. I have to be conservative with my bills but I do whatever I want, free if possible. I have the perfect life."
I loved Pratt's advice on planning for retirement. She wrote: "Pay off your mortgage, your cars and your credit cards before you retire. Fully invested in a 401 (k) at work."
Deb Hosey White of Greensboro, N.C., wrote: "My husband and I early retired 11 years ago at the front edge of the recession. We were both 54. It involved years of hard work, planning, goal setting, and a touch of good time and luck. As a human resource executive and a benefits expert, I knew the value of saving regularly, living below our means, investing wisely, paying down mortgages quickly, taking advantage of every tax-advantaged investment available, and being willing to relocate to a lower cost area when we retired. From age 20, we knew we wanted to retire early so we could write and travel in our 'second act.' That's what we've been doing for more than a decade. Last month, we turned 65. Even with the recession — that hit three months after we retired and moved from D.C. — we have maintained our nest egg and lived our dream. But it requires commitment, spending control and focus. Staying with employers long enough to earn retirement benefits is a boon to any early retiree. That was also part of our strategy."
Ellen Braun of Crozet, Va., wrote: "I am 59. I retired at 53 from a job with a Fortune 500 company. About six months later, I wasn't certain that I wanted to stay retired. I briefly bounced back to my former employer in a contract role. The stint as a contractor helped me get completely certain that I wanted to be retired."
Chase Squires of Denver is concerned that advocates of early retirement haven't adequately considered the cost of health care or that reducing their work years might limit their Social Security benefits. And he fears they've not factored in that tax-advantaged retirement accounts such as the 401(k) are "locked down" because of the penalty for early withdrawals.
"Nothing wrong with this FIRE movement and a focus on mindful saving, spending, and living," Squires wrote. "But people should think it all the way through."
"I never heard of any FIRE movement though it is close to what my husband and I decided to do many years ago," wrote Nancy from Puerto Rico. " We were not career professionals but we retired in 1993 with no regrets. I do know that people can live well on less than they think they can. Living in debt makes it impossible, and trying to 'keep up' makes it impossible."
"Okay, sure it might be possible to save 50 percent of pay and retire at 35 but WHY?" wrote Ken Thetford of Bethany Beach, Del. "I was in the military for over 25 years, traveled extensively and visited many places I had never heard of simply as a result of my work. My wife was an educator for more than 35 years and touched the lives of hundreds if not thousands of children, parents and other educators. Is our only objective in life to retire early and spend the next 40 plus years seeing and checking off items on our bucket list?"
Thetford also wrote, "What about making the world a better place, enriching the lives of our family and friends and meeting and learning about people from different backgrounds? Not that it can't be done in retirement but you meet a totally different group of people when traveling than you do when living somewhere for an extended period. I'm sure there are many of the FIRE adherents who have every intention of doing those things once they retire. However, many experiences in life are only presented once and working, striving and participating often bring unanticipated rewards and detours. I applaud those who save 30, 40 or 50 percent of their pay. It can't hurt to have a large nest egg to begin retirement. To paraphrase a well-worn cliche, 'Retirement is not a destination it is a journey.' If we hurry to get to the destination of retirement we may just miss out on the rich rewards, social interactions and life experiences of the journey."
Luz Flores of Lakewood, Calif., wrote, "I don't want all those young people retiring early. I need them to keep working and paying into my Social Security account!"