When creating a nest egg to provide for retirement, many peopleunderestimate a crucial retirement expense: health care.Rising health care costs play a significant part in retirement planning,especially as the average life expectancy continues to rise. The 2006Merrill Lynch New Retirement Study found that many boomers plan towork in some capacity during their so–called “retirement years.” In fact,the average age of when individuals plan to stop work completely is age70 or older. Individuals are planning to work longer for many reasons.Many hope that working will help them stay mentally (60 percent) andphysically (52 percent) active. Yet, 38 percent, a significant number ofAmericans, said they planned to work longer due to concerns abouthealth insurance.
Boomers in particular are wondering how skyrocketing health carecosts will impact their future plans as they near retirement. Othercost of living expenses aside, recent research from Employee BenefitsResearch Institute showed that individuals age 55 who live to age 90would need to have accumulated $210,000 (by age 65) or have sufficientretirement income to pay for insurance to supplement Medicareand out–of–pocket medical expenses in retirement. Boomers are realizingthat things are different today and that their financial lives are morecomplicated. Accounting for health care expenses will certainly impactthe many goals they have for their retirement years, which may includestarting a new career or business, cycling between periods of work andleisure, and pursuing other life goals.
If you’re a boomer looking for ways to conserve your retirement savings,there are some steps you can take now to prepare for costly healthcare expenses later.
One of your first considerations as it relates to covering your healthcare expense in retirement is to carefully understand what expenses, ifany, your employer (or perhaps your spouse’s employer) may cover. Seventyone percent of the individuals surveyed in the 2006 Merrill LynchStudy: A Perspective From Individuals And Employers, cited healthinsurance coverage as a major consideration in their work plans. If youexpect to work in some capacity during the early stages of retirement,be sure to consider what health insurance benefits that may provide.
In the employer portion of the study, concern over the increasingcost of benefit programs ranks as the most pressing human resource issuethat employers are facing. However, employers are also recognizingthe potential impact of the large number of baby boomers retiring fromthe work force. Because employers will want to retain key employees,particularly highly skilled professionals, many are thinking about newapproaches on how to structure their health insurance plans or accommodatethe new retirement lifestyle of baby boomers. The result, formany of these employers, may be a solution where employers will makemany health insurance plans available to part–time and seasonal “retired”workers, but with the worker paying most or all of the cost. Whilecoverage may still be expensive, this may provide access to individualsat group rates that would be hard to obtain elsewhere.
Prepare for Long–Term Care Needs
A fear shared by many Americans is that their hard–earned savingswill be used up while trying to pay for long–term health care. Manypeople buy a long–term–care insurance policy because they want tohave funds available for their own care and do not want to depletetheir assets and burden their spouse or children with nursing–homebills. Long–term care insurance can help provide coverage for care ina nursing home, in your own home, at assisted–living facilities or adultday care centers as well as help provide coverage should you later experiencea prolonged physical illness or disability. This type of insurance ispurchased for the same reason people buy auto insurance, homeowner’sinsurance and health insurance – to help protect themselves and theirassets. To determine if you should obtain long–term care insurance,consult with your Financial Advisor.
Plan Beyond Entitlements
While Medicare is available for those ages 65 and over, there has beenmuch press about future Medicare shortfalls. Preparing for your retirementshould also include a scenario that does not rely solely on entitlements.
Work with a Financial Advisor to help map out a strategy that willsupport you at your desired lifestyle regardless of potential futurechanges in entitlements. You should also make sure that your savingsplans include setting aside sufficient savings or income to cover healthcare costs. Maximizing your employer’s retirement plans is the firstplace to start, but don’t overlook IRAs.
If you and your spouse are both over the age of 50, you can contributea combined $10,000 ($5,000 in each IRA) in 2007. These contributionlimits may increase in 2009 and later years. Depending on whether ornot you or your spouse participates in an employer sponsored retirementplan, your tax filing status and your modified adjusted gross income,you may be able to take a current income tax deduction on yourIRA contribution. Even if you can’t, your contribution will still enjoytax–deferred growth potential. If your employer offers a high–deductiblehealth insurance option, explore saving in a health savings account(HSA). Not only do HSAs provide tax advantages, but saving for healthcare costs in a separate account will help you closely track how muchyou have accumulated toward this critical need in retirement.
Health care costs are often an inevitable and growing expense for retirees.By anticipating and including these costs in your retirement plan,you can adjust your savings to cover these expenses and accommodateyour retirement lifestyle.
Consider Every Piece of Your Financial Life
Your retirement goals may need to be considered in the context ofother goals, like preparing for college tuitions, charitable contributionsand estate planning services. Consider all of your retirement resources,including regular sources of income such as Social Security, pensions,annuities, and assets. To make the retirement you envision a reality, it’simportant to consider every piece of your financial life. Work with aprofessional advisor who not only helps guide you with your financiallife, but one who understands your retirement and other goals in orderto bring financial strategies that can help you meet those goals.
This material was prepared to support the promotion and marketing ofMerrill Lynch products. Merrill Lynch, its distributors and their respectiverepresentatives do not provide tax, accounting or legal advice. Any taxstatements contained herein were not intended or written to be used, andcannot be used for the purpose of avoiding U.S. federal, state or local taxpenalties. Please consult your own independent advisor as to any tax, accountingor legal statements made herein.
