Don’t forget health care costs when saving for retirement

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When saving for retirement is perceived as glamorous — for traveling to Hawaii or dining al fresco on the Mediterranean — it’s more palatable than realism.

But the harsh reality is that nearly everyone will need health care while retired. And insufficient savings for health care will make most other retirement hopes mere fantasies.

A July survey of the First Command Financial Behaviors Index showed that 72 percent of Americans are “somewhat concerned” about health care costs during retirement.

Respondents predicted they would only need an additional $33,000 during retirement for health care costs.

But this is woefully underesti-mated.

For someone retiring today, said Scott Spiker, CEO of First Command Financial Services Inc., and living to age 100, out-of-pocket expenses for health care are estimated at $166,000, which does not include any long-term care.

Recently, Gov. Bill Ritter sent a letter to many Coloradoans, inviting them to order a free planning kit as part of the Own Your Future campaign for long-term care needs. Ritter wrote that “the cost of long-term care is very high, and many people mistakenly believe Medicare will cover the costs.”

For many people, long-term care cost is the “single biggest financial event in retirement,” said Chuck Maher, a certified financial planner and registered representative with Wilbanks Securities Inc. “A well-thought out plan can help preserve both your wealth and your peace of mind.”

Five key risks that investors will encounter while planning for retirement are longevity, inflation, asset allocation, withdrawal rate and health care.

“Americans need to be acquainted with the magnitude of the problem. We’re sadly mistaken if we think the world will look like it does today, 15 or 20 years from now,” said Gordon R. Edgin, financial adviser and principal with First Command Financial in Colorado Springs. “None of us have any idea as to what we’ll ultimately have to bear in health care costs, but we citizens will have to bear more and more of our heath care costs over time.”

Thus, now is the time to plan and prepare — because even at the current rates, people aren’t saving enough to pay for health care.

But the biggest dimension to health care costs is long-term care, which is not covered by standard medical insurance.

The lifetime probability of “becoming disabled in at least two activities of daily living (and thus needing long-term care) or of being cognitively impaired, is 68 percent for people age 65 or older,” according to the American Association for Long-term Care Insurance.

“In Colorado Springs, long-term care alone can cost $80,000 per year — it’s staggering,” Edgin said. “And one in two people are likely to need long-term care in their lifetime.”

Without a long-term care insurance policy, people “will quickly erode their retirement savings,” Edgin said.

There are several options for saving for health care needs.

Before retirement, a health savings account can work along with a high-deductible major medical insurance, said David Wood, vice president of investments and insurance at Ent Federal Credit Union.

Up to $3,000 per year (or $4,000 if older than 55) can be invested in an HSA. Because of Medicare eligibility, after age 65, people cannot pay into their HSAs. But they can leave the money in the account and use it for eligible medical, dental or vision expenses, Wood said, or withdraw it to spend on anything, as long as it’s reported as income at tax time.

Another way to save is to make catch-up contributions after age 50 to 401(k)s and Individual Retirement Accounts.

But the most comprehensive way to protect against future long-term care needs is insurance.

“The risk potential for needing long-term care is so high compared to what anyone can save,” Wood said. “But the risk exposure can be mitigated by purchasing an insurance premium.”

It’s prohibitive for most people to save an additional million dollars or so for long-term care, but that’s about how much 12 years of long-term care in a facility would cost.

And waiting longer to face reality and purchase such insurance only costs more money.

For a healthy person age 50, the industry average for a $100 daily long-term care benefit is an annual premium of $1,394. By age 55, that premium rises to $1,598, and by age 75 it jumps to $5,908.

“A percentage of a retirement portfolio should be set aside for unforeseen circumstances,” Wood said, even when people have long-term care insurance and medical insurance.

“Financial planning is not fun,” Edgin said. “It’s something people instinctively want to ignore or avoid. But working with a financial planner will put people on a trajectory that will help them sleep better at night — help them have peace of mind.”

Ironically, although humans tend to fear the unknown, they shun planning for future needs.

Although saving for health care needs cannot ensure perfect health during retirement, it can eliminate the fear of how to pay for it.

“As we age, it is not uncommon to fear the loss of control of our own lives,” Maher said. “But by planning now, you can control how you will be cared for, and how your long-term needs will be met.”