Why Healthcare Might Be The Biggest Threat To Your Retirement Plan
When retirement plans fall apart, we tend to assume it’s because someone overspent – maybe on travel, hobbies, or helping the kids a little too much. But, often, that’s not what does the real damage. It’s health – everything from rising premiums to the surprise diagnosis no one saw coming.
Health shocks – big and small – are one of the fastest ways to derail even the most carefully crafted retirement plan. And preparing for the unknown? That’s hard. Really hard.
Dr. Carolyn McClanahan has seen both sides of this reality firsthand. She started her career as a physician, caring for patients and seeing how quickly health – and the lack of planning around it – could change someone’s financial future.
On a special episode of the HerMoney Podcast, sponsored by LIMRA, she explains how unexpected health costs impact women and what we can do now to protect our financial security later.
BUILDING A CAREER AT THE INTERSECTION OF MEDICINE AND MONEY
When Dr. McClanahan and her husband began searching for a financial planner, they struggled to find the right fit. The experience inspired her to do something extraordinary: She went back to school and fell in love with financial planning, ultimately building a career at the intersection of medicine and money.
Today, she’s the founder of Life Planning Partners, a fee-only financial planning firm, and a leading voice on how healthcare, aging and finances relate to each other.
“Once I became a financial planner, I saw how little financial planners understood about health issues and what happens when someone gets ill,” says Dr. McClanahan.
WHAT PEOPLE GET WRONG ABOUT THEIR HEALTH
Dr. McClanahan still practices medicine in a volunteer capacity to stay connected to the healthcare system and help people better understand the relationship between it and their finances.
One of the biggest blind spots, she says, is how much time, energy and money it takes to protect your health as you age. Even with Medicare coverage and ignoring long-term care, retirees face sizable costs for premiums, copays, and uncovered services. New research from the Center for Retirement at Boston College shows that after subtracting these costs, the typical retiree has only 71% of Social Security and 88% of total income left.
“It’s all these little nuances that people don’t think about in advance,” Dr. McClanahan says. “You end up making reactive decisions that are very expensive, whereas, if you’ve done some education and thought about it upfront, you can greatly reduce both the angst and cost if you actually get ill.”
WHY WOMEN FACE GREATER RISK
According to LIMRA research, women expect to live longer, but relatively few are financially prepared for that longer lifespan. As a result, they are more exposed to healthcare and long-term care costs.
One of the most important steps women can take, Dr. McClanahan says, is thinking well in advance about what kind of care they want and where they want to receive it. This is particularly important when it comes to long-term care – something women should start planning for in their 50s and 60s.
“Once you need home health care more than six hours a day, that’s generally about the same cost as an assisted living facility,” she explains.
“If you need care more than 12 hours a day, that’s about the cost of a skilled nursing facility. So it’s important to understand…do I have the money to afford continuing long-term care at home, or is there a break-even point that I should go ahead and move?”
Beyond understanding the math, Dr. McClanahan says it’s critical to communicate your wishes with loved ones and keep end-of-life documents updated.
“You need to make sure you have good advance directives…if your family knows what’s important to you about quality, it makes it easier for them to make healthcare decisions based on whether it’s going to bring that quality of life back,” she shares.
Studies show people without clear advance directives can spend thousands of dollars more in their final year of life than those who have documented their wishes.
If you don’t yet have an advance directive, Dr. McClanahan recommends Prepare for Your Care, a free, not-for-profit service provided by the University of California. The document should be reviewed and updated annually, she adds.
THE MEDICARE MISCONCEPTIONS THAT CAN COST YOU
If you’re banking on Medicare to cover long-term care, it’s time for a reality check. Dr. McClanahan says one of the biggest misconceptions is that it will pay for extended long-term care.
“When you have an acute event and end up in a skilled nursing home, it will pay for part of the first hundred days of a skilled nursing home – but there are lots of hoops you have to jump through,” she explains.
Confusion also surrounds the difference between traditional Medicare and Medicare Advantage. As Dr. McClanahan explains, Medicare Advantage plans essentially place insurance companies in charge of managing your care. While policies can look attractive when you’re healthy, costs and administrative hurdles can increase significantly once a serious illness enters the picture.
“I caution people…don’t be penny-wise and pound-foolish, go ahead and pay that extra to keep traditional Medicare because it is going to help you better down the road when you have serious illnesses,” she says.
To help fill the long-term care funding gap, for some, guaranteed income sources can play an important role.
“Social Security is the most important, of course, because it’s truly guaranteed,” explains Dr. McClanhahan. “For some people, if you don’t have the resources on your own and you want to make sure you don’t outlive your income, immediate fixed annuities are a great way to have guaranteed income that would help pay for long-term care.”
COGNITIVE DECLINE: THE HIDDEN THREAT TO WOMEN’S MONEY
Research from LIMRA shows women are more concerned than men about the possibility of cognitive decline impacting their financial decision-making later in life. Those concerns are well-founded.
“In reality, the biggest risk to an elder’s finances is actually themselves,” says Dr. McClanahan. “There are studies that have shown that there are more bills unpaid, bankruptcies and poor credit that occur three to five years before the cognitive decline is actually identified.”
To prepare for this possibility, Dr. McClanahan encourages clients in their late 50s and early 60s to create a financial caretaking plan. This plan identifies a trusted contact and outlines what should happen if financial decision-making becomes difficult.
Also, if your financial advisor is at an age where cognitive decline could become a factor, Dr. McClanahan says it’s wise to ask about their succession plan.
“You want to ask them, ‘What are you doing to build out your bench?’” she suggests. “If they’re not doing that, make sure that you’ve identified younger advisors that you can switch to once you’re concerned that your financial advisor is starting to have problems.”
WHEN IT COMES TO HEALTHCARE COSTS, DON’T PANIC…BUT DO PLAN
Planning for uncertain healthcare costs can feel overwhelming. But there are practical steps you can take now to protect both your health and your finances.
Here are Dr. McClanahan’s top tips:
Become an engaged patient: “You need to understand why your doctor does what they do, question them about it and make sure it’s right for you,” says Dr. McClanahan. “So much of medicine is now cookie-cutter because doctors aren’t given the time to do real healthcare. You have to take control of that. That’s the number one thing for mitigating healthcare costs.”
Know more isn’t always better: “We overuse medicine in this country,” says Dr. McClanhan. “So be realistic about what they’re offering and whether…the benefit is worth the cost to you financially, from a time perspective and from a worry perspective.”
Understand your spending: Controlling spending remains one of the most important factors in maintaining security in retirement. “Understand your spending and then be flexible with adjusting your spending as the economy adjusts,” says Dr. McClanahan.
One step you can take right away? Complete this “Healthcare and Aging Game Plan” worksheet from our friends at LIMRA. It will help you outline your healthcare priorities, decisions and anticipated expenses in retirement, as well as prepare you to talk through these topics with your financial advisor.