Market Overview

Medical cost never retire

Money magazine recently reported that the average couple retiring in 2018 at age 65 will have to spend $280,000 on medical costs in retirement.

According to a Transamerica study – from 2015, in full disclosure – they have saved only $172,000 to cover all retirement costs.

So you begin to see the problem.

Granted, as a USPFA member, you’re more likely to have saved more than the median American Transamerica was citing. Even so, you’re not exempt from that first figure, so let’s state it again: You and your spouse will likely spend more than a quarter of a million dollars on healthcare after you both stop working.

Taking action

The good news is that there are financial products and planning strategies out there to help you ameliorate this challenge. At least three have been time-tested and well worth your consideration.

Traditional long-term care insurance is the first one that springs to mind. It’s the most cost-effective, providing that you end up needing extensive medical attention. But it’s not for everyone. Not to get morbid, but what if you maintain an active, healthy lifestyle and pass away peacefully in your sleep? You end up never using the benefits from the LTC plan. We hope that your biggest regret on that day is that you threw away all those premium payments but, still, this is a financial consideration that ought to be weighed when making your decision.

In response to that pushback, about 10 years ago the marketplace started offering hybrid life/LTC insurance. These policies were engineered to take the portion of your LTC benefit that goes unused and pay it out to your beneficiaries upon your passing.

At the other end of the spectrum are annuities, which have the benefit of being more liquid. Annuities vary greatly in design, some being on the conservative end of the spectrum and others being more growth oriented investment vehicles and, depending on specific features and riders, they can be used for healthcare or any other purpose.

The Roth approach

Finally, a Roth IRA can be repurposed to serve as a healthcare account. This represents a different way of thinking about a Roth but, with proper planning, this might be the most effective option for your post-retirement healthcare spending. Like traditional LTC insurance benefits, the money in a Roth can be withdrawn tax-free, but then it can be used for any purpose, medical bills included.

Of course, there are tax implications for Roths, whether you’re converting your traditional IRA, or assuming higher taxable income during your working years or engineering a “backdoor” Roth.

So, despite their flexibility and liquidity, Roths can be complicated. Next month, we intend to dive deeper into why so many of our clients are asking about these and provide you with answers to some of the most frequently asked questions.

In the meantime, your particular circumstances might determine that a Roth isn’t indicated at all. It’s best if you schedule a call with a professional retirement planner to help you get started on figuring out how you’ll pay your medical costs in retirement.

That is, unless you have $280,000 lying around.