Health-care costs are the great unknown of retirement.
Not only are health expenses rising quickly overall, but medical needs and conditions vary dramatically from person to person. There are several moving parts, from combinations of different health-insurance packages to decisions around long-term-care coverage.
Out-of-pocket costs not covered by insurance can easily sink an otherwise buoyant ship if not planned for accordingly.
“The good news is Medicare picks up a lot of the cost,” said David Edwards, president of Heron Financial Group. “But there are always little extras on the side, and you can't estimate what those are going to be because everyone's health is going to be different.” Medicare, the federal health-insurance program for Americans aged 65 and older, covered 60% of health expenses incurred by seniors in 2012, according to EBRI's most recent annual report.
Mr. Edwards said most of his clients have Medigap insurance, which will cover the majority of health costs Medicare doesn't cover. To better ensure clients can cover future health costs, he tries to achieve full income replacement for them in retirement (rather than the 70% or 80% figure that's often touted). Rather than spend less in their retirement years, clients tend to shift the spending mix from children, clothing and cars, for example, to health care and travel.
“In general, if you provide 100% coverage of income in retirement, you're going to be OK,” he said.