Medicare doesn't cover everything. You may want supplemental and long-term care coverage, too.
Richard and Carol Bechtel, who are covered by Carol's Stanford-covered health care plan, in the maintenance hanger where they keep their plane in Crossville, Tenn., Oct. 3, 2012. Medicare does not cover all health expenses, so out-of-pocket costs could include deductibles, prescription premiums, eye exams and glasses, hearing aids and even long-term care.
It's not news that health care costs are increasing. Yet several recent studies show that few people factor those rising costs into their retirement plans.
Consider this example from an annual report from Fidelity Investments: For a 65-year-old couple retiring this year, the cost of health care in retirement will be $240,000, 6 percent more than that same couple retiring in 2011 would pay. The report assumes that the man will live 17 years and the woman 20.
"Most people don't realize Medicare covers much less than traditional employer plans," said Sunit Patel, senior vice president in Fidelity's benefits consulting group. "The $240,000 number captures the Part B premium for physician services, Part D for prescription drugs. Then there are deductibles and coinsurance and benefits that are not covered, like vision exams, hearing aids."
Another study, this one from Nationwide Financial, found that people who were near retirement routinely and wildly overestimated the percentage of health care costs covered by Medicare. It covers only 51 percent of health care services, according to the Employee Benefit Research Institute.
Robert Reynolds, president and chief executive of Putnam Investments, which has its own study, bluntly summed up the situation at a recent news briefing. "It makes no sense at all to talk about retirement savings or lifetime replacement income without talking about health care expenses," he said.
A calculator developed by Putnam, called the Lifetime Income Analysis Tool, shows people not only how much they have saved but also, starting next year, how much they need to save depending on their health (cigarette smokers with diabetes need to save the least because their life expectancy is the shortest) and where they plan to retire (Louisiana is the cheapest, Alaska the most expensive).
The case of the Bechtels
Carol and Richard Bechtel had worked in the San Jose, Calif., area, she for Stanford University and he at various technology companies. When it came time to retire in 2006, they put a lot of thought into where they wanted to live. They picked Fairfield Glade, a community in central Tennessee.
Cost of living was a factor. They were able to sell their home of 37 years in San Jose, pay cash for a house on a golf course, and still have money left over to put in their retirement account. Quality of life also mattered. By their account, the Bechtels are thoroughly enjoying their new community and friends. Bechtel found a hangar close to their home for his airplane, and they are closer to their son and three granddaughters in Wisconsin.
But when it came to knowing their health care expenses in retirement, they were pretty typical: they had to check on what the exact costs were. Their premiums, between Medicare, a supplementary policy through Stanford and a dental plan, will cost them $9,058.80 this year. That's up 14 percent from the same policies in 2011. And that number does not include any out-of-pocket medical expenses, like co-payments or the costs of over-the-counter medications.
"Health premiums are probably one of our biggest expenses," Carol Bechtel said.
Yet she is not complaining.
"Our premiums are small compared to what our bills would be," she said.
While most retirees pay for insurance that supplements what Medicare pays, how comprehensive and open each plan is varies. But the fear that they will not be able to choose the doctors or care they want drives some wealthier people to set up separate accounts for health costs.
Faith Xenos, chief investment officer for Singer Xenos Wealth Management near Miami, said she counsels clients to set aside 5 percent of their annual budget for health-related costs and deductibles.
"Let's all acknowledge insurance doesn't cover everything," she said. "We have this idea from years back that once you get your Medicare or your retirement benefits package that everything is covered." Not so.
For people wanting to retire before Medicare starts at 65, she advises buying a high-deductible plan and using a health savings account to cover out-of-pocket expenses.
Then there's the issue of long-term care insurance. Various studies estimate that the percentage of people who reach 65 and will need long-term care is 30 to 50 percent.
$76,000 a year in 2008
A Fidelity study in 2008 put the cost of one year of care at $76,000 and said that 50 percent of couples retiring in 2008 would need at least one year of long-term care, and 20 percent would need up to five.
"The question is: Are you going to pay for that out of your current assets or are you going to get a long-term care policy?" said John Hillis, president of Hillis Financial Services in San Jose. "These policies can be very expensive, and a lot of companies are getting out of the product because the insurance companies aren't making any money off of it."
In the case of the Bechtels, who are Hillis' clients, Carol Bechtel said they did not buy long-term care insurance because of the high cost. She plans to take care of her husband, who is 81 years old. She is 68.