The 4 Biggest Retirement Myths – Part 2
Yesterday, I discussed two money myths that interfere with smart retirement planning and showed you the plain facts.
I explained that the average person lives another 20 years after quitting work, despite the morbid and unfounded belief that most folks die within a year of retirement.
I also refuted the overly pessimistic notion that Social Security may suddenly disappear, and reiterated its significance as part of most retirees’ total cash flow needs.
Today, I will address two additional myths about retirement, with the focus on health care. To be sure, managing medical expenses in retirement is critical to avoiding a cash crunch when you can least afford it. However, for most retirees the cost of health care won’t be financial Armageddon as suggested by the alarmist headlines from mainstream media. Consider these two bogus but widespread beliefs:
“The average couple will spend $280,000 on health care in retirement”
In this case, the average figure is technically correct, but the logic is misleading. That is due to the outsized impact so-called “super-utilizers” have on the average cost of health care for the population as a whole. As a group, super-utilizers absorb 50% of all health care spending in the U.S. even though they comprise only 5% of the population.
You may think that retirees make up a disproportionately large percentage of super-utilizers given their advanced age and declining health, but that is not the case. Only 15% of all super-utilizers are aged 65 and older, identical to their percentage of the overall population. Nevertheless, they still skew the average cost considerably higher because they consume 20 times the cost of a non-super utilizer.
That means 85% of retirees will spend significantly less than the average on health care, while 15% will spend more than they can possibly afford. If the $280,000 average figure is correct and the 85/15 split holds true, non-Super Utilizer couples would spend closer to $144,000 over 20 years. That works out to about $7,200 per year, or about one-fourth the average Social Security retirement benefit per couple.
In short, the cost of health care in retirement is more of a binary proposition than it is an average experience. Either you and/or your spouse will turn out to be a super-utilizer of health care, in which case the cost will be astounding, or neither one of you will be a super-utilizer in which case the cost should be manageable.
“Eventually I’ll need long-term care but can’t afford it”
Of the four myths I have examined, this one has the greatest potential for a modicum of truth. That’s because advancements in medicine are prolonging life, but without a commensurate improvement in curing dementia. If and when there is a treatment for dementia that can offset longer lifespans, the cost for most retirees should be feasible.
According to a recent study by the National Bureau of Economic Research, only 10% of the elderly have a private long-term care insurance plan, despite the average cost of $50,000 per year for a semi-private room in a nursing home. Multiplied by an average stay of two years, the average lifetime cost per user comes in at $100,000.
That’s the bad news. The good news is there is a better than even chance you won’t need it all. But if, for example, you are part of the 44% of 65-year-old women that ends up using it, here are a few points to ponder:
- If you own a home and have significant equity in it, you may be able to “age in place” by using a reverse mortgage to pay for in-house visitation.
- If you do not have home equity to tap, your Social Security benefit combined with an accelerated Individual Retirement Account (IRA) withdrawal schedule may be sufficient to cover the cost.
- If you have no home equity and insufficient retirement savings, you may qualify for Medicaid assistance, which unlike Medicare does offer a long-term care benefit if you qualify.
Of course, no one likes the idea of getting sick, much less worrying about how they will pay for it. Unfortunately, it is a reality in retirement that almost all of us will have to deal with. That’s why it’s important to know what your options are and what they will really cost, and not be scared into inaction by headlines that suggest there is nothing you can do.