Pre-Funding Health Care to Extend Savings!

Posted on September 20, 2011 by Bill Faiferlick

Prefunding Health Care Costs to Avoid the Potentially Crippling Effect in Retirement

Outliving assets because of health care costs is a real possibility for many Americans. Health care costs could consume the largest portion of your investments.

There are methods to pre-fund some of these expenses for professionals and business owners on a tax deductible basis. This pre-funding helps business owners and professionals by providing immediate tax deductions and the accumulation of contributions in a tax smart environment. Every business owner or professional should take advantage of the benefits offered through available strategies.

The Future Expected Costs of Health Care

According to a current Fidelity Investment report, retirees in 2007 can expect to pay $215,000 for health care premiums assuming they don’t have employer health care and expect to live to average life expectancy. Fidelity researchers estimate the $215,000 will be eaten up by three costs: Medicare Part B and D premiums, which account for 32 percent of the total; Medicare co-payments, deductibles, co-insurance and other cost-sharing items, which account for 35 percent; Prescription drugs, which account for 33 percent. According to the EBRI report, for a married couple living to age, then this figure jumps to $550,000.00. Added to this extremely large price tag, is the fact that only 51% of expenses are covered by health care services.

Based on the current programs available, health care is going to consume a significant portion of everyone’s retirement nest egg. Health care costs are expected to increase annually at rates faster than inflation. In 2006, health care costs increased 8.0%. In 2007, the increase was 8.3%. When the study was conducted by Watson Wyatt, the increase in 2008 was expected to reach 11%. Based on the compounding and inflationary effect, health care costs will consume a large percentage of our retirement capital.

For future retirees, if you are 55 in 2008 and are expecting to retire in 2018 (ten years from now), this scenario looks entirely different. The 2008 report released by EBRI on Savings Needed to Fund Health Insurance and Health Care Expenses in Retirement, shows that for a married couple, they will need savings of $1,064,0000 for Medigap premiums, Medicare Part B premiums, Medicare Part D premiums and out-of-pockets drugs expenses.

“In 2004, the average 65-year-old paid 18.6 percent of Social Security income toward Medicare premiums and cost sharing. By 2010, Medicare spending as a percentage of Social Security is expected to be 39.2 percent. Inpiduals can expect to pay even more in premiums and out-of-pocket for health care services in retirement because of the financial condition of the Medicare program. The Part A trust fund is expected to become insolvent in 2019 under intermediate cost assumptions. Tax revenue collected in 2019 would cover only 78 percent of the expected benefits in that year, meaning that Medicare will be unable to pay promised benefits.” Savings Needed to Fund Health Insurance and Health Care Expenses in Retirement: Findings from a Simulation Model May 2008.

Options available to business owners, professionals and affluent inpiduals

Many business owners are accustomed to paying medical premiums for themselves and their employees as a business expense. Unfortunately, in retirement, there are no further business expenses and medical costs are paid with after-tax income. Professionals, are accustomed to being their own care-givers during their working years and a surprisingly large percentage of professionals, fail to anticipate the cost of adequate private medical coverage post retirement and are financially unprepared for these medical premiums which is the main option once they are retired. Business owners and professionals need to be aware of and take advantage of pre-funding benefits on a tax-deductible basis that can improve current profitability and decrease the pace of capital depletion during retirement.

Links to Other Articles or Information on Health Care Costs

This PBS video is an incredible examination of Health Care around the world and is well worth watching if you haven’t seen it:

Sick Around the World: Can the U.S. Learn Anything from the Rest of the World About How to Run a Health Care System?

One of the foremost leaders in conducting research and disseminating it is EBRI – Employee Benefit Research Institute founded in 1978 and has presented a large volume of reports on the changing landscape of health care. You can review any number of reports from them:

The Savings Needed to Fund Health Insurance and Health Care Expenses in Retirement report

Fidelity Investments has been following the increasing cost of medical coverage through an annual study and the results are summarized in the following two articles in:

Retiring? Be sure to include health care costs in plans

Retiring couples need $215k for health costs: New research from Fidelity finds health care costs could eat up a bigger portion of Social Security benefits.