One of the biggest mistakes people make in their retirement plans is underestimating their medical expense burdens. Traditionally, early retirees overlook this major expense, but it is likely that in the next few years this expense will spike higher than many retirees anticipate. It is important that people recognize the trends behind changes in medical costs and the potential for higher costs, and include these factors in their retirement plans.
In the past, retirement plans were upset when employers reduced or eliminated retiree medical benefits. Most retiree medical benefit plans allow employers to reduce the benefits at any time. Many early retirees were hurt because they retired with employer-provided medical benefits and did not realize high much medical insurance costs for those who retire before they are eligible for Medicare and how hard it is to obtain.
The big surprise for many retirees in coming years likely is to come from Medicare.
Most retirement plans assume that Medicare is sustainable as presently structured. The plans assume Medicare will continue to cover most of the major hospitalization costs it covers today.
The numbers paint a different picture. Medicare will not take in enough tax dollars to pay for current benefits in just a few years. Congress finally will be required to take action.
There are several potential actions Congress could take to shore up Medicare’s finances. Already the monthly premiums are rising for higher-income taxpayers. The premiums could increase further. Another possibility is a reduction in benefits. One way benefits might be reduced is by an increase in deductibles and co-payments. Another possibility is that the types of medical care covered could be reduced. In any case, the reductions likely will be means-tested so that higher-income beneficiaries bear all or most of the burden.
Barclays Global Investors did a study of the potential changes and their effects on retirement plans. It concluded that for simplicity and precision, it is best for retirees and prospective retirees who anticipate retirement income of $40,000 or higher to assume that they will have to pay an additional $7,000 annually for medical expenses. The amount was determined by using the average cost of a standard medical expense policy for a 60-year-old male. For a married couple, the cost would be twice that because each spouse would be subject to the changes.
In the last few decades employers found they could not afford the retiree medical benefits they offered. The government is likely to find Medicare is in the same situation. Changes are imminent. Retirees and pre-retirees should anticipate this change and factor higher medical expenses into their plans.