A lifetime health care estimate can sound like a bill due the day you retire. Jae Oh, CFP, author of Maximize Your Medicare, says retirees should recognize that those expenses are paid over time.
In this interview (watch the video too), Oh and I, discuss how retirement income can help pay those costs, why national averages may not reflect an individual’s circumstances and how aging can affect a health care budget.
Below is a transcript of the interview with Oh, edited for brevity and clarity.
How should retirees interpret lifetime health care estimates?
Bob Powell: A lifetime estimate creates awareness, but people pay health care expenses annually, potentially through Social Security or distributions from an individual retirement account. Doesn’t thinking about those annual expenses make the number more manageable?
Jae Oh: No doubt, Bob. While the numbers are big and help increase awareness, we don’t think about how much we will spend on food over a lifetime and say we need all of that in a 401(k) to have a secure retirement.
There is also the presumption that I’m going to live all 30 years. We hope it’s true, but there are many scenarios where it’s not.
So it’s not as if you have to pay that number up front today.
Why do Medicare costs deserve attention?
Powell: It is still a big sum of money on top of living expenses. What do you make of that?
Oh: I think it raises awareness. Many people who are not familiar with Medicare presume it covers everything at zero dollars: You enroll when you turn 65 or retire, and everything is free. That is untrue.
While the numbers are big and help increase awareness, we don’t think about how much we will spend on food over a lifetime and say we need all of that in a 401(k) to have a secure retirement… So it’s not as if you have to pay that number up front today.
It’s important for people to understand that there are big costs they are going to encounter through retirement as they think about their retirement plan.
Why might health care averages miss your circumstances?
Powell: You are not fond of averages. What is your disagreement with using them here?
Oh: Even the premiums on Medigap can vary a great deal from state to state. The numbers reported may be too low, for example, if you live in Miami-Dade.
The cost of a Medigap policy for a 75-year-old will be much higher there than in Ohio. You’ve got these averages, which aren’t going to be wrong arithmetically, but they just may not apply.
For people living on Social Security alone, or people whose savings and investments may not support the retirement lifestyle they want, Medicare Advantage is a different price point entirely.
How might aging affect your health care budget?
Powell: Is planning for health care costs as a percentage of income, with that percentage increasing as people age, a useful approach?
Oh: I think that is as good as any. In general, Father Time is undefeated, and sometimes that path can be bumpy for some people.
I think it makes sense that, as you get older, you will require more health care services and incur higher costs, requiring a bigger percentage of your retirement income.
What should retirees keep in their planning?
Powell: Take the lifetime estimate with a grain of salt, but recognize that you need to plan for health care costs in retirement. Is that fair?
Oh: I think that’s very fair. People are planning year to year and throughout time.
Health care and long-term care services can involve very large numbers and can change the trajectory of retirement stability depending on your resources.
Related: The 2027 health insurance shock: How GLP-1 costs and the ACA “Subsidy Cliff” could hit your wallet