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Medical Expenses in Retirement: A Major Planning Gap

Many individuals have overlooked the likelihood that they will face sizable medical expenses during retirement.

Indeed, Fidelity Investments estimates that couples entering retirement this year can expect to spend $220,000 in medical bills during their golden years,while the Employee Benefit Research Institute estimates that couples age 65 have a 90% likelihood of spending $255,000 in medical bills. While the sizeable expense may be sobering for individuals seeking to save for retirement, it underscores an attractive opportunity for financial advisors to help clients take appropriate actions to manage healthcare expenses in their later years.

Like all niches, of course, planning for medical expenses can help advisors differentiate their services from competitors. By being able to explain the need to prepare for medical expenses, furthermore, advisors can help convince individuals that they must take action to ensure they can enjoy a secure retirement.

Medicare, of course, is the primary source of medical insurance for most individuals age 65 or older. Many individuals fail to understand, however, that Medicare provides no stop gap limit on out-of-pocket expenses. In addition, individuals must choose among Medicare options.

For example, Medicare A provides limited hospitalization expenses while Medicare B is for non-hospital expenses. Other options are available for prescriptions and Medicare Advantage can provide supplemental insurance for certain expenses not covered by A and B.

Sorting through the different options can be confusing and time consuming, but most advisors believe doing so is worthwhile as it can result in considerable savings in insurance premiums.

The bottom line, however, is that even with Medicare Advantage, individuals will need additional strategies for dealing with medical expenses. Advisors should be ready to address two approaches.

The first approach is to protect retirement assets from medical creditors and the second is to find additional insurance programs to cover expenses.

Retirement savers may be able to shelter their assets from medical creditors by keeping as much of their assets as possible in 401(k) plans and other retirement programs. In addition, certain trusts can be created that protect assets from creditors.

Another approach is to put retirement savings into an annuity, which may also shelter assets. In the case of trusts and annuities, however, the protection may be lost if enough time does not pass between implementing those sheltering strategies and becoming ill. In other words, the federal government may claim that creating the trust or establishing an annuity was improperly done simply to avoid paying for medical expenses.

A host of strategies also exist for increasing resources for medical expenses. Some individuals may elect to continue working beyond age 65 so that they continue to qualify for their employer-sponsored medical insurance. While doing so provides individuals with the benefits of employer subsidized insurance, it also provides more working years to save for retirement.

Employees may also elect to pay for their employer sponsored insurance after they retire through COBRA—although such a strategy is only temporary as employers are only required to offer the insurance for a limited time period.

Other types of insurance products may be appropriate for some individuals. Certain annuities, for example, may offer medical riders that will drastically increase the value of the annuities when long-term illnesses rack up high medical bills.

Other strategies include buying long-term care insurance and saving money in Health Savings Accounts (HSA), which offer certain tax advantages. In order to qualify for an HSA, however, individuals must be enrolled in a high deductable medical insurance plan through their employer.

Planning for medical expenses is clearly a complicated undertaking that may involve the assistance of estate attorneys and insurance brokers. Yet, advisors who are able to offer the services are likely to have a competitive edge over other advisors that are unable to offer solutions for preparing for medical expenses in retirement.

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