Financial Planning, Retirement

Do Not Underestimate This Retirement Expense

4/25/18 8:00 AM

iStock-478018251.jpgIt is never too late to start saving for retirement. In fact, a person with no money set aside at age 50 who finally begins maxing out his or her annual 401(k) contributions can still amass $1 million by age 70, according to Motley Fool calculations. A million dollars, though, is not the substantial sum of money that it once was, and many Americans may be shocked by how quickly they can go through such a nest egg. One thing that can wind up eroding a person’s retirement savings a lot faster than anticipated is healthcare, and even wealthy individuals recognize that they cannot afford to ignore potential old-age medical expenses.

Indeed, a recent UBS survey found that nearly seven in ten U.S. investors with at least $1 million in assets cited healthcare costs as their biggest retirement concern. Those worries are understandable given that Fidelity Investments this month estimated that a 65-year-old couple retiring in 2018 will need to have around $280,000 just to cover their likely healthcare costs in old age. That is a 2 percent increase from just twelve months earlier and a 75 percent jump since 2002 when this study was started. Moreover, the headline 2018 forecast is derived by adding together the expected medical outlays for a 65-year-old male ($133,000) and female ($147,000), and each of those individual numbers is nearly as large as the combined couple’s total from 2002 ($160,000).


What is worse is that these estimates do not even take into account the costs of over-the-counter medications, most dental services, and long-term care. The researchers added that additional expenses are likely if retirement begins prior to Medicare eligibility, something which 56 percent of respondents in an earlier Fidelity survey said they could not avoid. Nearly one-third (30 percent) of those individuals reported that they retired sooner than expected due to a health event that affected them or their spouse. Further, 49 percent of early retirees said that they had to rely primarily on their personal savings to cover the out-of-pocket premiums, co-pays, and deductibles associated with insurance coverage.

All of this only increases the importance of setting aside as much money for retirement as possible. The sooner one can start the better, and additional help is available by utilizing a 401(k) plan and other tax-advantaged savings vehicles. For many people it may also be worth consulting a professional financial advisor given that almost half (46 percent) of surveyed adults estimated that they would need less than $100,000 to cover their healthcare outlays in old age. A third of respondents even admitted that they have no idea what their medical expenses could be in retirement.



Sources: Motley Fool, UBS, Bloomberg, Fidelity Investments

Post author: Charles Couch