This hidden expense could derail those retirement plans

James Nichols, senior vice president of Consumer Solutions Group, Voya Financial
Key Points
  • Longer lifespans means retirees need more money to last ever longer, especially for expenses such as health care.
  • Near retirees need to have a vision of retirement, the means to achieve that vision and confidence in their plan.
  • Plans must be protected from crises that may impact savings before actual retirement.

By the time you reach retirement, managing your income and expenses will most likely have become second nature to you. Your paycheck arrives, you pay the bills, and the remainder of your income goes to savings or other expenses, such as entertainment. However, this all changes when you reach retirement.

Of course, you'll enjoy the freedom that comes with no longer having to report to an employer. But you'll inherit a new responsibility, which requires skills and knowledge you rarely utilized in your pre-retirement life.

As the "chief financial officer" of your own retirement, you're responsible for making your retirement savings — a lump sum of cash that took a lifetime to save — into a steady income stream for a period of time that could last 20 years, 30 years or even longer. To make matters more complex, as your pool of retirement savings shrinks, your medical expenses are likely to rise.

The ability to pay for health-care needs is one of the most critical issues of retirement.
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The ability to pay for health-care needs is — and will remain — one of the most critical issues of retirement. Most people today will live longer than their parents or grandparents did. That means they'll enjoy a longer retirement — but it also means they will most likely need more money to cover health care and other costs during that time. Additionally, health-care costs currently are rising more than two-and-a-half times the rate of overall inflation. This makes it even more difficult to estimate what your health-care expenses might be throughout retirement. So how do you plan for this? Here are a few tips to get your started.

Various industry research has concluded that 69 percent of baby boomers and 66 percent of retirees estimate their health-care costs in retirement to be "$100,000 or less."

Those estimates are below Employee Benefit Research Institute projections that the average 65-year-old man would need $127,000 in savings, and a 65-year-old woman would need $143,000, to give each of them a 90 percent chance of having enough savings to cover health-care expenses in retirement.

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Life expectancy charts give you the average life expectancy for a man or woman in the U.S., but for a more personalized estimate, consider your own health record along with the medical and longevity history of family members. Knowing that your grandmother had high blood pressure or that your grandfather lived well into his 90s will provide a clearer picture of how long you should plan to live in retirement.

Retirement planning aside, knowledge of your family's medical history could help you plan for a hereditary condition or prevent a serious illness or health event by way of preventive care.

In order to achieve retirement readiness, you need to have a vision of your retirement, the means to achieve that vision and confidence in your plan. First, consider your needs, wants and wishes. Will you stop working or will you need to maintain some level of income? Will you be traveling, visiting grandchildren or taking up a hobby? Do you want to buy a vacation home? It might seem odd to talk about retirement travel plans during a conversation about health care, but your ability to pay for necessities such as doctors' visits and prescriptions is directly correlated to your efforts to plan, save and budget for the retirement you want.

During the first phase of retirement, many people remain active and healthy — leading to increased spending on travel and activities. As they age, they may become less active, reducing leisure expenditures. However, costs will rise again as they continue to age and their health-care needs increase. Financial experts call this the "Retirement Spending Smile" because of how the spending pattern is visually represented on a chart.

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Failing to plan for this spike in the later years of retirement could seriously derail your plans. Additionally, living beyond your means (or incurring significant credit card debt) could cause sacrifices that affect health or quality of life, such as foregoing medical care or prescriptions to cut costs.

Finally, it is important that you protect your plan from crises that may impact your savings before you retire. Unexpected medical expenses are a key reason seniors say they file for personal bankruptcy, so it is also important that you pay attention to health-care costs while you are still saving for retirement, to make sure you have adequate coverage and emergency funds to mitigate potential medical expense "shocks."

Planning for an event with so many variables may seem daunting, but it is achievable with a little guidance. Financial advisors can help you understand how much you will need to save to cover health-care costs, and how to adjust your current retirement savings strategy to incorporate these costs. This includes navigating difficult-to-understand government benefits such as Social Security and Medicare, and understanding the gap between what these benefits will cover, and what medical care will actually cost.

The sooner you start and develop a holistic retirement plan that includes a special focus on health-care needs, the more secure your financial future can be.

A financial advisor can help you decide how to do this using a number of different savings vehicles that might include a pension, a traditional or Roth individual retirement account, a 401(k) plan, a Health Savings Account, cash-value life insurance, annuities, stocks, bank accounts or sources of income.

Regardless of what stage of life you're in now, it's never too late (or too early) to start planning and saving — especially with an understanding of your future health-care needs. Getting a head start on planning and saving for retirement is advantageous, but even those starting the process in their 50s have an opportunity to be successful.

Ideally, the sooner you start and develop a holistic retirement plan that includes a special focus on health-care needs, the more secure your financial future can be.

— By James Nichols, senior vice president of Consumer Solutions Group, Voya Financial

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