By Michael Tove Ph.D., CEP, RFC, co-author of “What You Don’t Know About Retirement Income Can Hurt You!”
Most people retire at or after reaching age 65, when they’re eligible for Medicare benefits. Traditional Medicare parts A and B do not cover all the costs of medical care and requires one of two forms of supplement: standard Medicare Supplement plans offered for a premium and Medicare Advantage Plans which, in some cases, have no premium. The advantage with traditional Medicare Supplement Plans is that they are widely accepted by hospitals and doctors, require no adherence to an authorized network and are completely portable. However, they require premiums which generally increase through time. Conversely, Medicare Advantage Plans are (usually) more cost-effective but often require adherence to an authorized network or doctors and hospitals and are regionally specific meaning different plans are offered in different counties within a state.
Regardless of how a retiree is insured, as long as a comprehensive insurance plan is in place, the likelihood facing catastrophic medical bills is quite small. This translates to a simple observation: Budgeting for healthcare costs during retirement is not about hoarding buckets of money for healthcare. It’s about paying for the cost of healthcare insurance.
The principal of insurance is that the risks of the few are mitigated by a collective of many. Suppose there is a 1 in 1000 chance you will get seriously ill and the cost of care for that illness is $100,000. Now suppose you are in a pool of 10,000 people all with the same odds. In other words, of those 10,000 people, 10 will get sick (for a total expense of $1,000,000) and 99,990 will not. But nobody knows who. However, if everyone chips in $1000, everyone is protected. That’s the principal of insurance.
For most retirees, the cost of Medicare Part B is a little more than $100 per month. Double or even triple that for the cost of Medicare Supplement, prescription drug coverage, for perhaps $300 -400 per person per month. To be fully protected it’s not necessary to have an enormous bucket of money to cover the “What if.” Rather, it’s only necessary to have a reliable source of permanent income sufficient to pay the bills.
Many, perhaps most retirees generate their primary income from Social Security benefits and corporate retirement plans from past employers. At age 70 ½ that income is supplemented by Required Minimum Distributions from IRAs, 401(k) and 403(b), etc. plans. From this, there are three distinct possibilities:
- These income sources are more than enough to pay the monthly bills, including healthcare insurance premiums, now and into the foreseeable future.
- These income sources are enough for the short-term but are likely to be insufficient in the future.
- These income sources are insufficient to pay the bills right now, not to mention into the future.
So, in determining how to budget, first identify which of the three best represents you.
- If the first, congratulations. You don’t need supplemental income planning. Secure comprehensive insurance and live life to the fullest knowing you are fully covered.
- If the second, identify when (years from now) you may start feeling the “squeeze.” Next, determine the approximate amount of monthly short-fall. Seek to generate a future income account which is deferred (yet grows) starting ASAP and is capable of delivering the needed income make-up when that time comes.
- If the third, time is of the essence. Convert an appropriate amount of savings and/or retirement funds into lifetime income starting immediately and make sure it is adequate to keep pace with a reasonable expectation of inflation.
So if the “secret” is creating income, how is that done? The answer is to establish a “personal pension;” in other words, an annuity. Annuities are accounts from insurance companies that provide a guaranteed lifetime of income. It’s what they’re designed for and nothing else does that. However, recognize that not all annuities are created equally. Some are far better than others, so be careful how you pick one. The good news is that you can only get an annuity from a professional licensed agent. Just seek one who is independent and has access to a wide array of products and companies.