Health Care Can Be a Retirement Nightmare

Physician's Money Digest, December 2006, Volume 13, Issue 12

When doctors dream about retiring, theypicture themselves teeing off on lush golfcourses, relaxing on sandy beaches, ortaking exotic vacations. Chances are, they aren'tthinking about trips to the neighborhood drugstoreor the local pharmacy.

A survey in October 2005 sponsored by Aetna,Women's Policy Inc, and the Financial PlanningAssociation found that nearly 20% of Americans aged45 to 75 years have spent no time thinking about theirretirement health needs, while nearly 40% have spentless than an hour in the past year planning for healthbenefits in retirement. More than 30% of those surveyed,roughly 1 in 3, had no idea what to expect.

The Harsh Reality

Health care is likely to represent one of thebiggest—and most unpredictable—expenses of yourgolden years. Medicare, of course, will cover manyof your health care expenses after you retire.However, the federal government won't cover everything.Medicare, like Social Security, was created ata time when most employers offered their retireesboth pension plans and health care benefits. Doctorsare likely to enjoy neither luxury, which forces themto think ahead about this critical issue.

As every doctor knows, the price for the best careavailable isn't likely to fall, and the medical advancesthat are making your patients feel better longer canonly continue, boosting costs further. A study in2003 by the Employment Benefits Research Instituteestimated that a typical retiree without job-relatedhealth benefits would pay more than $1 million onmedical expenses during retirement.

The study assumed a person would live to age100, and that medical costs would go up 14% peryear. While that scenario is unlikely to greet everyretiring physician, the reality is we cannot predicthow long we will live or how deeply inflation will cutinto the value of our savings.

Health Savings Accounts

There are many ways to save, and all physiciansneed to set aside as much as they can toward retirement.However, there is another vehicle designed tolet people save specifically for health care: a healthsavings account. The accounts work like 401(k)s inthat they let you set aside pretax money and have itgrow tax-free. The money remains tax-free as long asit is used to cover medical expenses.

The accounts work in conjunction with a high-deductiblehealth plan. The deductible typically is theamount that the account holder is allowed to putaway each year in the account. For 2006, the contributioncap for individuals is $2700. For plans coveringa family, the cap is $5450. People age 55 or oldercan make additional contributions of $700.

Political pundits have debated the merits of theseaccounts and their impact on the health care system asa whole. However, there is little question that theaccounts can benefit some individual savers. At the veryleast, they offer you another tax-free savings method.

To prevent health costs from turning your retirementdreams into a nightmare, you should start planningnow. If your financial advisor hasn't alreadyraised the issue with you, you should raise it at yournext meeting. Better yet, ask for a meeting simply todiscuss this critical issue.

Richard M. Braverman, CFP®, RFC, is principal of BravermanFinancial Associates in Lancaster, Pa. He has more than 20 yearsof experience in the industry, is a registered representative offeringsecurities through FSC Securities Corporation, and a registeredbroker/dealer. The views are those of Richard M.Braverman, CFP®, RFC, and should not be construed as investment advice.Braverman Financial is not affiliated with FSC Securities.