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Before retiring, plan for medical expenses

Amid continued market uncertainty and lingering questions surrounding government health care reform, there is one thing today’s baby boomers and aging population can be sure of: Medical care will play a role in their future.

Health care reform is on the horizon, and it is still unclear to what extent individuals will be covered under new legislation. Rising health care costs will have an increased impact on boomers, and those in the years leading up to retirement must take strides to become aware of the steps they can take during the planning years to protect themselves.

What medical care really costs

To understand the importance of planning for future medical care and expenses, it is important to know how much late-in-life care may end up costing.

According to the American Association of Homes and Services for the Aging:

• a private room in a nursing home can cost up to $77,000 per year;

• a semiprivate room in a nursing home can cost up to $69,000 per year; and

• living in an assisted-living community can cost on average $36,000 annually.

Even before the need for daily care arises, preretirees must consider other health and monetary demands. According to the Employee Benefit Research Institute’s November study, “Health Savings Needed for Retirement,” the near-elderly (those ages 55 to 60) will need a significant amount of savings to account for medical-related expenses. Women retiring in 2020 will need $147,000 to have a 50 percent chance of funding medical expenses, while men retiring in 2020 will need $111,000.

What medical care does to your bottom line

The figures represent costs beyond everyday expenses of food and shelter and examine women and men individually, so married couples have an even higher savings mark to meet. When faced with such expenses, retirees will tap their savings plans — their only existing income source — to meet mounting bills.

It is common among married couples to become accustomed to the cash flow when both partners are living. Unfortunately, after the passing of one spouse, benefits are cut in half, a reality that many don’t account for in their financial plan and one that comes as a surprise to individuals involved.

The cost of late-in-life medical attention can quickly become a significant burden on retirees and their families, and Social Security and Medicare benefits will only scratch the surface in covering an individual’s medical-related expenses. Oftentimes, when addressing these costs, retirees find themselves putting their health and their savings on the line.

What’s the remedy?

When examining the bigger picture, it becomes clear that most retirees will have significant savings gaps to address. However, there are solutions available for the country’s aging population.

One of the most obvious solutions is long-term care insurance. LTCI helps cover the costs of long-term medical care later in life and, therefore, can help supplement the cost of the in-home care or assisted-living facilities.

Benefits vary by policy, but most will cover a specific dollar amount per day spent in care and provide much more flexibility and options than standard public-assistance plans. Supplemented with existing savings, LTCI can significantly ease the financial burden of regular medical care.

In addition to LTCI, there are other options to offset the mounting cost of medical care. Fixed-index annuities with a long-term care rider that can be formatted to double as income for home health care or a single payment immediate annuity are both vehicles for aspiring retirees to prepare for medical-related expenses, and the individual value is based on an individual investor’s situation and income needs.

Aspiring retirees might also consider life insurance with an accelerated benefits rider. Accelerated benefits, sometimes known as living benefits, allow a policyholder to benefit from their policy’s proceeds in the event of specific, predetermined circumstances, such as a critical illness, the need for nursing home care or terminal illness.

Purchasing a life insurance policy with an ABR is another option available for retirees hoping to ease the financial burden of unexpected medical costs.

Even with an uncertain future on the horizon, aspiring retirees can add a level of certainty to their retirement future by taking strides to protect their physical and financial well-being. As individuals develop their financial plan, it is vital to be as mindful of health care components as they are to their basic income needs.

Note: The EBRI’s data denotes both savings figures in 2020 dollars.

Chris Hobart is founder and CEO of Hobart Financial Group in Charlotte.

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