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Rising Health Care Costs and the Impact on Soon-to-Be Retirees
Over the past few months, Americansâ concern over inflation has steadily increased. A Gallup poll coordinated in March noted that 17% of Americans believe the high cost of living and inflation is a significant problem, up from just 8% in January. For individuals who may be nearing retirement, there are planning considerations to be mindful of as prices continue to rise â most notable, given the significant cost to retirees, is health care. Â
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While inflation may result in higher prescription and medical supply prices in the short term, health care costs typically outpace inflation over the long term, regardless of market conditions. This means soon-to-be retirees need to be forward-thinking and include health care costs in their broader financial plan.
Estimate costs
According to a model Vanguard developed with Mercer Health, even with Medicare, average health care costs can reach over $5,000 per year. In my work with clients, I typically focus on health care planning when an individual or couple is five to 10 years outside of expected retirement. This advanced planning can enable someone to develop a thoughtful approach to preparing for â and ultimately paying for, future health care costs.
A few years before retirement, start thinking about retirement timeline logistics. For example, if an individual is planning to retire at 62 but wonât be eligible for Medicare until 65, theyâll need to determine how theyâll cover health expenses for three years. For some, they might consider joining their partnerâs health insurance plan (if the partner is not retiring at the same time), going with COBRA or finding a short-term insurance plan to cover the gap. Otherwise, it might mean tapping liquid assets or an HSA to pay for health care expenses before Medicare coverage kicks in.
Next, map out anticipated expenses early on and develop a corresponding savings plan to meet future objectives. Medicare.gov provides helpful information on eligibility and premium estimates. Vanguard also provides Personal Advisor Services clients, for example, with a Health Care Cost Estimator that forecasts health care and long-term care expenses. Â
Evaluate family history
Of equal importance to timeline logistics is health considerations, such as family medical history, longevity expectations, and current health status, as those factors could influence your Medicare coverage choice. Of course, the concept of planning for a potential health scenario can be emotional. However, a forward-looking approach, and one that is guided with a financial adviser, can limit the need to make abrupt and challenging decisions amid a health crisis.
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An additional possible expense â not covered by Medicare â is the need for long-term care. The leading conditions that often spur the need for long-term care include dementia, stroke, Parkinsonâs disease and osteoarthritis. Assess family history well before retirement and determine whether long-term care may be an expense worth accounting for.
The need for long-term care can be a financial âwild cardâ since some clients may not require it in their lifetime. I work with clients to think through hypothetical situations as it can determine proper health care objectives tied to a financial plan:
- âAre you planning to relocate in retirement?â Some locations (such as the West Coast and Northeast) can have higher health care costs.
- âWill someone care for you as you age?â If the answer is yes, that will offset costs. However, without a spouse or childâs support, it likely means the need for outside resources, which can be costly.
- âWhere will I feel most comfortable as I age?â That could be the difference between in-home nursing, a shared room at a nursing home or private resources at a more expensive facility. Â
Remember financial âtrade-offsâ
In addition to assessing family history and calculating potential future health care costs, itâs important to understand the financial trade-offs that will come into play throughout different decades. For example, many retirees in their 60s see a portion of their retirement income funding travel or newfound hobbies. As retirees age and this activity decreases, there is a natural trade-off in expenses â the money that was once funding a golf habit may now be allocated toward prescription costs. This financial give-and-take is important to keep in mind, as retirement income will naturally fluctuate through different seasons of life.
Health care is just one piece of the retirement planning puzzle. And, as prices continue to rise in this space, itâs critical to develop plans years before retirement to ensure long-term financial security.
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Discussing Family Legacy Plans? 5 Tips to Navigate âthe Talkâ
Passing wealth through generations can be fraught with complexity. Money is often an emotionally charged topic, and an older generationâs plans and intent for transferring wealth can trigger an array of reactions from younger family members.
Recent projections show that by 2045, $72.6 trillion will be passed on to heirs, and another $11.9 trillion will be donated to charities. The sheer magnitude of this generational wealth transfer amplifies the need for families to develop, and talk through, detailed legacy plans.
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I often work with clients to coordinate a comprehensive multi-generational meeting where family members can come together in a safe, neutral space for the older generation to communicate their financial and non-financial plans to younger generations. For families â regardless of wealth level â looking to utilize a similar concept, below are five tips to make this meeting successful.
Preparation is key
For older generations interested in bringing their family together to discuss legacy plans and the future passing of wealth, the preparation before the meeting is paramount. Not only should the legacy plan be mapped out well in advance, but thoughtful consideration should go into the actual meeting. Who from the family should attend? Where will multiple generations meet? Is travel involved? Is it best to conduct the meeting around the holidays when families will be near one another?
Prepare for â and even practice â specific conversations that are critical to have, and determine the level of detail to share with family members. Doing this legwork upfront allows the older generation to be in the driverâs seat during the meeting.
Plan to have an objective third party present
Ideally this will be a trusted financial adviser, an attorney or an estate planner. A third-party, objective partner will be able to guide a productive conversation, helping the older generation to articulate their plan and prepare younger generations for their future roles and responsibilities to ensure everyone is on the same page.Â
Anticipate problematic conversations
Ahead of the family meeting, visualize how certain family members may react to decisions. For example, if a sibling is likely to become upset over an unequal inheritance, anticipate and prepare for how the conversation should be navigated. Share specific insight into why that decision was made. Flagging sensitive conversations in advance, and preparing a response with your trusted adviser, can help determine the best strategy for the family discussion to come.
Understand the meeting doesnât have to disclose dollars
While the older generation may feel tempted to outwardly define exactly how much money will be passed to heirs and charities, it can be more beneficial to keep the conversation high-level, so families donât get caught up in discussions around who gets what.
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Talk about goals rather than dollars, and most importantly, know that an inheritance can be equal, but not equalized. Meaning, perhaps one sibling (who is single) receives an outright inheritance while another sibling (married with children) has a trust set up where they can withdraw funds to support, for example, their childrenâs future college needs. The ongoing trust can continue the generational legacy planning should this child have descendants.
Walk away from the meeting defining clear roles and responsibilities
The overarching goal of the meeting is for the older generation to lay out their financial and non-financial wishes and have family members clearly understand future roles and responsibilities. The older generation should consider younger family membersâ interests, time commitments and other factors as they coordinate who is most appropriate to tackle different roles within the legacy planning process.
For example, is one adult child more equipped to serve as a trustee, managing their parentsâ legacy plan and executing their future wishes? Will another adult child be better equipped to handle non-financial matters, such as vetting future living arrangements and taking this older generation to doctor appointments? This emotional support is an important role to define but can often go overlooked.
While this initial multi-generational meeting is foundational to the wealth transfer process, it is a conversation that likely will not start and end with one session. Older generations should continuously mentor younger generations to educate, inform and align them on future family values and goals. That said, the overall legacy plan is something that should be reviewed annually or when larger life events trigger the need to reassess the plan.Â
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17 Tips for Getting a Job Out of College
As if adulting wasn’t enough, juggling final exams, project deadlines, and a social life, along with worrying about getting a job out of college, can make the last few months of your senior year feel overwhelming. The good news is…
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