Me: “When would you like to retire?”

Client: “Well, I’d like to retire soon but know that I can’t. I have to work until at least age 65 so that I have health insurance…”

The client in the above dialogue might be right; he or she may indeed need to work until age 65. Pre-Medicare healthcare costs are a factor in the retirement decision and a significant one at that. But so is a mortgage, so is the need to buy a car, buy groceries, support family, etc. Every living objective that equates to a cost is a factor. Pre-Medicare health care costs play a role in the overall determination of whether you can afford to retire, but these are costs that are too frequently blown out of proportion.

Health insurance coverage prior to Medicare is a highly political and highly publicized topic. It is often in the news and is a part of our day-to-day conversations. The result is that it often seems like a bigger retirement factor than it actually is, and people ping to age 65 (the age of Medicare eligibility) because working until 65 means not having to bridge the gap between employer-provided insurance and Medicare—it means not having to worry about it.

This is why we encourage anyone evaluating their preparedness for retirement to take three steps to help them understand the impact of pre-Medicare health care costs on their retirement decision. By doing so, it’s not an unnecessary point of anxiety. The steps include, first, giving pre-Medicare health care costs appropriate context; second, knowing what it costs and how long one you will have to pay for it; and third, knowing what the worst case might look like. Taking these three steps helps you understand the impact and make a more informed decision about when to retire.

1) Give pre-Medicare health care costs the appropriate context

Pre-Medicare health care costs are an expense and should be thought of as such when it comes to the retirement decision. At the highest level, the financial decision of “when” you can retire is going to be heavily influenced by three overarching pieces of the financial picture:

• Your future cash inflows (E.g., Social Security, any pension income, investment income, etc.),
• Your future cash outflows (E.g., living expenses), and
• Your balance sheet (E.g., savings accounts, taxable investment accounts, retirement accounts, residential and investment property, etc.)

Ultimately, the financial decision of whether you can retire is going to be based on the confidence that your balance sheet can support your cash flow (both future cash inflows and outflows). To that end, the cost of healthcare is a determining factor of when you can retire as it’s clearly a future cash outflow. Health care costs, like taxes and groceries, are something that you know you will have to spend money on in retirement and like any expense, affects your cash flow and the probability that your retirement savings can absorb it. To that point, understand that pre-Medicare health care equates to an expense and that you can plan for it like other costs.

2) Know what it costs, and how long you will have to pay for it

Remember, health care costs matter to the retirement decision because it is an expense—money you know you will spend—and this means that it can be planed for it like any other expense. We just need to make two assumptions: First, how much you will need to pay and, and second, how long you will need to pay it. For health care costs, we can make informed assumptions about both.

Time frame: In most cases, the time frame during which you are paying for individual health coverage prior to Medicare is relatively short. Even if you were to retire at 55, you would only be paying for health care for ten years at a higher cost.

Costs: Fortunately, there is a great deal of research available on costs. We can build plans based on the average premium and out-of-pocket costs at any given age (or adjust from the average based on specific circumstances). For example, for an individual age 60, AARP estimates a little under $10,000 / year in total health care expenses (premiums + additional out of pocket costs)

Understanding the timeframe and the amount that will be needed allows us to plan for it. With these two pieces in place, we can plan for it just as we would a mortgage payment.

3) Know what the worst case looks like

Understanding the worst case scenario and the actions necessary in that scenario relieves anxiety and lessens the fear which comes from feeling that potential health care costs are a great unknown. We can research the minimum costs (i.e., the premiums) and the maximum out-of-pocket costs (the maximum a plan will require you to pay), and we can incorporate risk into planning then make decisions about what we would do in the worst case. Below, we’ve totaled five years of maximum and minimum costs for the Oregon Bronze, Silver and Gold plans available on the open market to illustrate this:

As the chart illustrates, with each of the plans (regardless of tier), the maximum exposure is in the neighborhood of $100k for five years. $100k is undoubtedly a big expense, but with the worst case as a known expense, plan for it, and determine what we would do if the worst case happens.

Returning to the client in the conversation above, taking these three steps to understanding the impact of Pre-Medicare health care costs might mean that the client works longer to protect against the worst case. Or, it could be that he or she retires sooner but prioritizes other objectives and determines today the required actions should the worst-case materialize.

Whatever the right decision for you, you can be confident that it will be an informed decision not motivated by anxiety or fear of the unknown.

Photo by Timothy Kolczak on Unsplash

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