Below is an article on healthcare changes and how they’ll affect your retirement written by eMoney CEO, Ed O’Brien. This article was originally published on Forbes.com.
As Congress and the new administration look to overhaul the Affordable Care Act, healthcare has been a hot topic in the news. And rightly so, as the outcome is likely to have an impact on most of us.
Regardless of the outcome, the cost of healthcare in retirement will remain an issue that individuals need to address to properly plan for the future. I hear this all the time from our financial advisor clients, as they explain the critical implications of not properly planning for healthcare expenses both pre- and post-retirement. After all, healthcare is not cheap, even for those who are deemed “healthy.”
The Hard Numbers
Retired households spend an average of $40,938 a year with healthcare as the third most expensive item following housing and transportation, respectively, according to the Consumer Expenditure Survey conducted by the U.S. Bureau of Labor Statistics in 2014. Furthermore, the survey shows that healthcare spending increases with age.
Fidelity’s 2016 study on retiree healthcare costs projects that a couple, both age 65, would need $260,000 during retirement to cover their healthcare costs. This is up from $245,000 in the 2015 study and $220,000 in 2014.
Additionally, the 2016 study indicates that retirees will need an additional $130,000 in retirement savings to cover projected long-term care costs.
Clearly, this is a significant amount of money and these numbers are likely to keep growing over time.
Retirement planning implications
Whether you are a do-it-yourselfer or use a financial advisor, healthcare costs need a line-item in your retirement budget. For those working with an advisor who uses a financial planning system that allows online collaboration, this is a great way to monitor how changes in the healthcare landscape impact your financial and retirement planning.
Changes in the cost of coverage offered via Medicare, your current health insurance or your health situation, these changes can be discussed and updated online by you and your advisor. The sooner the impact is reflected in your plan, the more time you and your advisor will have to implement a contingency strategy if needed.
Failing to account for this additional cost in retirement can impact your post retirement plans in that you may not be able to afford the lifestyle you had hoped for. If you’re not sure where to begin on how to account for these costs, here are a few ideas to get you started.
Health Savings Accounts
A health savings account or HSA can serve the dual purpose of providing a vehicle to put away money on a pre-tax basis for current medical expenses, or medical expenses down the road. A recent segment on The Nightly News with Lester Holt addressed HSA’s and how they can be part of your financial plan by serving as another saving tool.
Like a 401(k), these accounts allow you to contribute money on a pre-tax basis allowing for an immediate tax-break. Although HSAs can only be used in conjunction with a high-deductible health insurance plan, money can be withdrawn at any point to cover qualified medical and dental expenses tax-free.
The money can also be carried over year-to-year, even into retirement if it isn’t needed to pay current medical expenses. HSA funds can be invested like an IRA and allowed to grow to cover medical costs in retirement.
Just like your other investment and retirement accounts, your financial advisor can advise you on establishing the HSA and investing this money. The more sophisticated financial planning systems used by tech-savvy financial advisors now incorporate HSAs as part of client’s net worth. Additionally, an HSA investment account can be monitored just like an IRA or a brokerage account.
Flexible spending accounts
Flexible spending accounts or FSAs also allow you to contribute pre-tax money to cover qualified medical and dental expenses. The difference from an HSA is that FSA money must be used in that year and cannot be carried over. It’s “use it or lose it” so to speak.
Before contributing to an FSA, it is important to have an idea of what you might spend on medical and related items so you don’t over contribute. If you use budgeting apps, you should be able to easily track your medical expenses so you can make an informed choice come open enrollment.
Your financial advisor should be able to help here. To the extent that your spending and banking information is aggregated into their financial planning system, they can suggest an appropriate amount to contribute each pay period.
Medical expense deductions
For 2017, the threshold to be able to deduct unreimbursed medical expenses on your tax return is 10% of adjusted gross income. This is a pretty high hurdle, but there are situations where this is applicable. One example is a major illness or surgical procedure.
Sometimes accelerating medical payments into the current year, or deferring them to the next year, will allow you to meet the 10% threshold and claim a deduction. The timing of the expense should also be looked at in combination with your income year-to-year. If your income will be reduced in a particular year due to a medical condition, perhaps you can lump the payment of related medical costs into that year as well.
This is a great opportunity to collaborate with your advisor and benefit from their insights here. The cashflow information aggregated into their financial planning system can help you best plan based on your current needs.
Win-win for clients and advisors
Planning for healthcare costs will continue to evolve as one of the major issues in financial and retirement planning. Technology provides a leg up in terms of researching options and viewing the impact of changes on your financial plan. The sooner you know how changes in healthcare will impact your retirement, the sooner you and your financial advisor can include these changes in your planning strategies.
As access to financial advice and advisors continues to advance, I can envision more in-depth and sophisticated dialogues surrounding this topic.