Retirement sounds like a single thing. Most often the day you stop working. But retirement is actually an entire phase of your life. To help prepare for it, it helps to imagine retirement and the planning for it in three (very different) phases.
The 3 Phases Of Retirement
Phase #1: Living the Dream
In phase one of your retirement, most people dream of living their very best life. We’re talking about big leisure time, enjoying hobbies, spending more time with family and friends, and doing everything you put aside for the duration of your career.
During this first phase most people enjoy reasonably good health and a sense of independence. But as you age, you will eventually enter the second phase of retirement, when you will likely begin to need increased support.
Phase #2: An Easier Pace
In the second phase of retirement imagine slowing down a bit. While you might still be able to do most of the things you were doing before, now it takes a little more energy to do them. Things like strength, endurance, coordination, and fine motor skills aren’t what they were. Heavier chores like yard work might become a little more difficult. Small injuries take longer to heal. And more common aches and pains may mean a few more doctor visits.
Phase #3: Assisted Movement
Thinking about the third phase of your retirement can be tough. It’s important to be honest and recognize that you may no longer be able to live as independently as you would like. Common things you’ve done your whole life like grocery shopping or preparing for holidays may require additional help. In many cases you may need support from a nurse or family member. It’s during this phase that you should expect healthcare costs to go up significantly. Planning for phase three is something you should do as you approach active retirement. It’s important to consider financial opportunities that combine insurance with long-term care benefits. This should allow you to use benefits to pay for services such as skilled nursing, in-home care, and medical services.
Understanding Healthcare Costs
Almost everyone underestimates the cost of healthcare in retirement. This is because people believe that the Medicare benefits they’ve contributed to their whole life should cover all or nearly all of a retiree’s healthcare costs. The truth is they don’t. While Medicare may cover a significant portion of a retiree’s medical costs, your out-of-pocket costs can and will add up.
Plan To Pay For Basic Medicare Premiums
Depending on income, Medicare Part B premiums can start at nearly $1,800 a year and add up to over $5,800 a year per person. However, it is also important to realize that Medicare does not cover many items and services you will likely need. For example, today, Medicare does not cover prescription drugs, long-term care costs, dental care, vision, or hearing aids.
Additional Expenses for Expected Needs
If you want the costs for some very predictable services to be covered, you’ll need to purchase additional insurance coverage. There are a broad range of options here. You may have heard of a Medicare Advantage plan, Medicare Part D, long-term care insurance, or a Medigap policy.
It’s also important to recognize that your healthcare costs will not be fixed. As you move through the phases of retirement your need for standard and more complex medical services increases. While initial expenses may be manageable, between inflation and increased use of medical services, costs can increase significantly as you transition from an active and independent lifestyle to needing more assistance.
The Increasing Costs of Healthcare
In 2019 the average annual cost of health insurance for a couple retiring at age 65 was $12,286 per year. 10 years later that cost rises to $21,164 and by the time that couple reaches 85 in 2039, the cost is expected to be $34,268 annually, or $2,855 per month. It’s important to note that these projections do not include the expenses for long-term care.
Source: HealthView Services
Understanding Long-Term Care Costs
Long-term care is a difficult topic to discuss. However, it is incredibly expensive, so being caught unprepared presents significant financial challenges. Most people think of long-term care as a nursing home. In most cases, long-term care typically begins at home before transitioning to a long-term care facility.
Being cared for at home has many advantages, but it also places added costs and pressures on family members. Proper care is a profession, and often requires the assistance of home healthcare aides and other professionals. Another option for long term care is an assisted living facility. Assisted living facilities attempt to combine an independent living lifestyle with the convenience of on-site health professionals. But they can be substantially more expensive than staying at home.
Many families make their decisions based on the level of care that a family member requires. More severe conditions, such as Alzheimer’s disease and dementia, may require more help than family members can offer, forcing families to explore other options.
How To Pay For Healthcare Costs In Retirement
Incorporating healthcare costs into a retirement income strategy is critical to helping you maintain your standard of living. And while certain out-of-pocket expenses, such as premiums and deductibles, can be accounted for, other costs, such as long-term care expenses, can be expensive and unpredictable.
Keep in mind that Medicare provides only limited long-term care coverage. For example, coverage is limited to 90-days in a skilled nursing facility and is subject to other limitations. So, once again, you can’t rely on Medicare as a solution for long-term care costs.
When it comes to long-term care expenses, there are three ways to cover the costs:
traditional long-term care insurance
linked benefit or hybrid insurance
Traditional Long-Term Care Insurance
Few, if any, insurance companies offer new traditional long-term care insurance policies. But if you happen to own a traditional long-term care policy, you’ve already chosen the amount of coverage, how long it lasts, waiting periods, etc., when you purchased the plan. Your long-term care policy can be subject to annual premium increases, so it can’t hurt to reevaluate them to make sure they meet your expected needs.
Hybrid Life Insurance Products
Today, long-term care insurance is typically combined with life insurance. The concept is that if retirees need to access the life insurance policy for long-term care while they are alive, they would be able to draw down funds from the expected death benefit to pay for long-term care needs. However, the draw-down is usually subject to monthly limits and restrictions. If there is any death benefit remaining at the time of death, that would be paid to the policy’s beneficiaries.
Personal savings offer the highest degree of flexibility. It is the retiree’s money. So he or she can use it as they see fit for whatever expense they may incur. However, since long-term care costs can be unpredictable and expensive, personal savings may not be sufficient to cover care costs. Furthermore, for married couples, if one spouse’s needs consume the bulk of personal savings, little may be left for the surviving spouse.
If you’ve planned well to get this far, you should recognize the importance of planning what are truthfully the final phases of your journey. After you’ve done some golfing or fishing, or taken some long walks on the beach, take the time to sit down, evaluate your current situation and build a plan that best supports you and your family moving forward.