Don’t Underestimate Medical Costs in Retirement

The fiscal cliff crisis dominated the last month of 2012. Even though an agreement was reached on New Years Day, the compromise is far from the end of partisan political battles and confusion. Observers are already making predictions about the possible implications of the looming “debt ceiling” fight between the White House and certain members of the Republican caucus which must be resolved in the next month or two. The outcome may have significant impacts on the nation’s long-term stability and the performance of the financial sector.

It is easy to see how New Yorkers thinking about their long-term care planning and retirement might be uneasy about the state of affairs. While some things are simply out of your hands, it is critical not to forget that there are smart ways to plan for retirement regardless of the flux in national politics. A recent Forbes article is worth a look, as it explores five of the best way to protect one’s retirement from the federal government’s “fiscal follies.”

Plan Ahead
For example, one basic step might be to increase the availability of certain cash on hand in an emergency fund. While many financial advisors recommend a three to six month supply, many are now advocating a six to nine month supply for security purposes.

Another tip is to be extremely vigilant when savings for long-term medical costs. The article points out that many overestimate their needs when it comes to basic retirement living expenses but vastly underestimate their medical needs. For example, a Fidelity Investments project recently pointed out that a couple retiring now at the age of 65 likely needs around $240,000 for Medicare premiums and co-payments.

Even then, those estimates do not account for even higher premiums that must be paid by certain couples for Medicare Part B and Part D. Singles making $85,000 annually and coupes bringing in over $170,000 are required to pay that extra amount. In fact, some proposals (including one by the President) call for freezing those income levels until 25% of seniors are paying the extra premiums. The bottom line being that there is a good chance that more seniors will have higher medical burdens in their elder years. Those higher costs must be taken into account by the prudent senior planning for their retirement needs.

One way to combat this risk is to take advantage of tools like Health Savings Accounts (HSA). These accounts allow contributions of several thousand dollars a year, growing tax-free so long as the funds are used for eligible medical expenses, like long-term care costs or Medicare premiums.

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