Irony Aside, Don't Let Healthcare Costs Derail Your Retirement Plans

Doctors ought to know better than anyone how late-in-life healthcare costs can deplete a person's retirement savings. Yet research suggests that, on average, physicians are just as unprepared for post-retirement healthcare costs as everyone else.

There’s an old adage that physicians make the worst patients. To my knowledge, that assessment is backed up by some (perhaps apocryphal) anecdotes, but very little hard data. There is, however, some evidence from Fidelity Investments suggesting that physicians, despite earning higher annual average salaries than those in most professions, are often unprepared for the financial challenges that come with retirement. The findings challenge the assumption that because physicians earn high average salaries, they should be financially prepared to retire.

Although not specifically mentioned in the Fidelity analysis, one key reason those nearing retirement fall short of their savings goals is unanticipated healthcare costs. Knowing what you know about the costs of healthcare, and seeing the many situations in which unexpected health conditions arise, ask yourself: Are you fully prepared?

If you can’t calculate…estimate

So much of retirement planning involves calculation: how much you’ll need, how much you’ll save, and what your expenses are likely to be once you hang up the white coat. Healthcare, however, is one of the biggest expenses in retirement, and it is notoriously difficult to estimate. Medicare, which is available to people age 65 and older, won’t be around forever under the current system. Even if it is still available when you retire, it isn’t likely to foot the bill for all of your healthcare costs. If you have a chronic or serious health condition now, or will need long-term care in the future, you may be looking at an overall healthcare cost of $250,000 or (much) more over the 20 or more years you may live in retirement.

One way to deal with the unexpected is to estimate your costs. Age, personal and family medical history, and other factors such as maintenance medications you may be likely to take go into this calculation. Many retirement providers have savings calculators that allow you to plug in facts about your current health status, when you plan to retire, and other factors to give you a better sense of what you’ll need. A financial consultant or advisor can also offer some guidance.

Part of this estimation will involve looking into what, if any, health benefits you can look forward to as a retiree. Today, fewer employers than ever offer health coverage for retirees, but some still do. Consider also whether a spouse may continue to work after you retire, or, conversely, if your spouse is likely to retire before you.

Maximize Your Savings

In a future article, we’ll take a more in-depth look at Health Savings Accounts (HSAs), but for now, it’s important to note that many employer-provided retirement plans offer more savings opportunities than a simple 401(k). Your employer may offer a Retiree Health Savings Plan may be available through your employer. These tools offer a tax-advantaged way to save for healthcare-related expenses in retirement. If you’re self-employed or you participate in a high-deductible health plan, you can take advantage of an HSA. HSA contributions can be rolled over from year to year (unlike Flexible Spending Accounts), and any contributions you make to an HSA will be tax-deferred. Although you can’t continue to contribute to an HSA once you are enrolled in Medicare, you can continue to use the funds you’ve accumulated until they run out.

Although you can’t prepare for every eventuality, learning more about the opportunities available to you will help you take steps to ensure that healthcare—your own bread and butter—doesn’t derail your retirement.