The future costs of health care are a known financial time bomb to any retirement plan

Posted on March 15, 2010 by Bill Faiferlick

The old adage is that you save now for later; however, for many reasons – most of them psychological – people don’t save or don’t save anywhere near enough for later.

So how do you motivate yourself to start saving for your future retirement which needs to include sufficient cash for short and longer term medical coverage and other medically related expenses which according to EBRI will cost most of us each $800,000 for just out-of-pocket and co-pay expenses?

Remember, Medicare only covers about ½ of the coverage you’ll need. The $800,000 is only for the government sponsored portion while the other half of your coverage will be some form of private pay costing much more. Forget about the added expenses of paying for any trauma or unexpected medical intervention as no allowances have been made for this either.

According to Harvard economics professor, David Laibson: ” Humans, like a lot of other animals, place full weight on what happens right now and half weight on what happens even a few days from now.”"That’s because we react emotionally to immediate gratification and think logically about future rewards. Emotion often trumps logic. Logical thinking, including thinking about our financial future, occurs in the prefrontal cortex of the brain” as demonstrated by Jordan Grafman, a neuroscientist at the National Institutes of Health. (Kiplinger’s Personal Finance 04/2010)

Many people assume that in retirement, having saved $1 million was a monumental sum.

If you assume you live 30 years in retirement, that’s an income of $33,333 before taxes annually excluding inflation and investment gains which can rule each other out over time.

Now assuming you were the couple aged 64 below whose medical insurance premiums had now increased to $1,692 per month, you’d be faced with annual medical premiums of $20,304 excluding any out-of-pocket expenses or other non-covered services.

How do you live on $13,029 a year if you have utility bills, groceries, insurance, taxes. You get the picture.

These realities are occurring in 2010 for many Americans. A retired couple aged 64 and too young for Medicare with a private Premera Blue Cross plan faced a monthly increase in their premiums from $1,150 to $1,692 – this is a whopping 47 percent increase. Depending on the medical plan, many individuals have seen their monthly premiums escalate from 20 percent to 76 percent. More information is available in Chapters 1 and 2 of my book, It’s Your Money: Your CPA May Be Costing You Millions.

Assuming you are paying for your future medical premiums with after-tax dollars, how much do you need to have saved just for medical insurance premiums?

Professionals and business owners have unique options available to them unavailable to most working Americans to make time their ally and protect their financial future by taking the first step.

If you are a business owner or professional who is used to living on more, do the math. Take your current income and multiple it times twenty five years at a minimum and that’s your number – the amount of cash you’ll need to ensure you have something resembling the life-style you’ve grown accustomed to. The next step is to inquire how you can reduce your tax liability by one half and increase your savings for now and later.