The Challenge of Financing Health Care in Retirement

Many people ignore the impact health care costs will have on their nest eggs as they age. In fact, only 12% of working Americans have taken any steps toward addressing medical expenses in retirement, according to a study cited in HealthView Services' 2016 Retirement Health Care Costs Data Report.

There's a reason for people's lack of concern. Most have gotten used to having an employer pick up some percentage of the cost of their medical insurance premiums; it's been a company benefit they've counted on forever. They have no idea what the burden will be when they're left to foot the premiums on their own, perhaps because they chose to retire early or because they were a victim of downsizing.

And the result is some serious sticker shock.

Take, for example, a married couple in their late 50s or early 60s, who because of their age have health issues that make it necessary to choose a more comprehensive—and, therefore, more expensive—health insurance plan.

It's probably going to cost them about $18,000 a year—an expense they didn't plan for and isn't in their budget.

Think Medicare will save them when they reach 65? Think again. According to that same 2016 report, the total projected health care premiums (Parts B, D and supplemental insurance) for a healthy 65-year-old couple retiring this year are expected to be $288,400 (in today's dollars) over their lifetime. Factor in the out-of-pocket expenses such as deductibles, copays, hearing, vision and dental, and the cost goes up to $377,412. For someone who is now 55, that cost will be closer to a half-million dollars.

So the conversation becomes, "By the way, Mr. and Mrs. Client, do you happen to have $400,000 or $500,000 lying around that you can use to take care of these costs?" In a lot of cases, they haven't even saved $500,000!

What can they do about it? Well, for one thing, they can take better care of themselves. The last thing you want, after you've worked hard all your life to accumulate savings, is to have your health be a hindrance on your ability to enjoy your retirement.

People invest systematically toward their future finances—they consult with a financial professional and put money away every paycheck. Think about it: The automatic investments into a 401(k) happen no matter what, and these deposits slowly compound over time into a large sum of money. This is called the compound effect.

The same strategy works for investing in your health: You should automatically take your vitamins and commit to an exercise plan. Of course you won't see results right away, but the compound effect of these good habits will have a profound impact on your health in retirement. The problem is a lot of people ignore investing in their wellness, and it slowly compounds in a negative way.

Of course, medical costs will come up for even the healthiest of people and need to be planned for, including those dreaded long-term care costs. Very few people are planning for that—maybe one out of four—which means most people will cover those expenses themselves when the time comes. And that money will come dollar for dollar out their portfolio.

Even those who purchased a long-term care insurance plan while they were young are at risk of eventually being priced out, because the premiums are going up so quickly.

So again, it comes down to creating a plan. There are alternatives to LTC insurance, such as long-term care savings accounts. There are insurance policies that can provide additional cash flow in the event of a long-term care situation. And if you don't qualify for life insurance, there are annuities with optional riders, generally associated with an additional cost, that can help you offset the costs of long-term care expenses.

It's an area of financial planning that a lot of professionals gloss over while they focus on investments or converting your 401(k) to a Roth IRA.

But the hole at the bottom of the bucket for most retirees is this health care issue.

That means working on your weight, cholesterol, blood pressure, etc., as well as your retirement plan, at the same time.

Richard W. Paul is the president of Richard W. Paul & Associates, LLC, and the author of "The Baby Boomers' Retirement Survival Guide: How to Navigate Through the Turbulent Times Ahead." He is an Investment Adviser Representative and insurance professional.

Kim Franke-Folstad contributed to this article.