Plan to pay for future health costs

  @Money February 28, 2014: 4:07 PM ET
new retirement carolyn mcclanahan

Carolyn McClanahan, 49, president, Life Planning Partners, and former ER doctor, works health care costs -- which can vary widely -- into retirement planning.

NEW YORK (Money Magazine)

Choppy markets and rising health care costs needn't stop you from having the money for the retirement you want. We asked five of the brightest minds in retirement planning for their big ideas to help you cruise through the obstacles.

Below, advice from our third expert, Carolyn McClanahan, a financial planner and former ER doctor.

Savings needed for a married couple to pay for health care
And one item that really moves the needle is how much you spend on prescription drugs.
$151,000 $255,000 $360,000
50% chance of having enough, with typical high drug costs 90% chance with typical high drug costs 90% chance with high drug costs
NOTE: Typical drug cost is median; high is 90th percentile. SOURCE: EBRI

Big idea: Plan health and wealth

In general, putting in the effort to do the right things now will make your retirement easier to pay for. Max out your 401(k), invest in lower-cost funds, diversify, and keep your debt low, and it will all add up to more income later.

But other things you know you ought to do -- hit the gym, eat right, make sure you see the doctor regularly -- actually make your retirement plan more complicated. Good health means you are going to have to save more. "There is a cost to living longer," says Carolyn McClanahan, a former ER doctor who now works primarily as a financial planner in Jacksonville.

Working health costs into your plan isn't simple. "The numbers vary widely based on your need for health care services and how long you live," says Paul Fronstin of the Employee Benefit Research Institute.

McClanahan argues that health doesn't have to be a complete unknown, though. She asks her clients a few simple but important questions. "Have you ever spent a night in the hospital?" opens the door to discussing big medical issues that might affect how long you live.

To get a feel for your longevity, McClanahan suggests using an online calculator such as Livingto100.com.

McClanahan then asks clients what medications they take. A man who is typical in how much he spends on prescriptions needs $122,000 saved to pay all out-of-pocket health expenses if he wants to have a 90% chance of having enough. A woman needs $139,000. Note that this number isn't how much you'll spend (that's actually more); it's how much you have to have already saved by 65.

Calculator: Can you retire early?

But it can be more. If you think it's likely that you'll use a lot of expensive meds -- for example, if you already have several chronic conditions -- you should consider these numbers: Among men, the high prescription spenders (the 90th percentile) need to set aside a further $50,000 of their nest egg from the start. For women, it's $56,000.

McClanahan says she also tries to address a more sensitive topic: How are you likely to respond to health crises near the end of your life? The costs can be large: The average person has out-of-pocket expenses of $39,000 in the last five years, and the top 10% spend $89,000 or more.

How to save for retirement in 2014

"When faced with a terminal illness, do you want to do everything you can to extend your life? Or will you just want palliative care? There's no judgment," she says. "But if you don't know how you'll react, you should be saving more."

MAKE THE RIGHT MOVES

Protect your health care dollars. In addition to dictating how much money you'll need, your health affects the shape of your spending and your investment strategy. If you know you have high fixed medical costs, you can't assume you'll be one of those retirees David Blanchett says decrease spending.

Related: Do your retirement dreams match?

From the outset, you'll need to be conservative with your spending -- and your portfolio. "You can't afford to take risks with your money," says McClanahan. A healthier retiree can afford to be a more aggressive investor, because she'll have more discretion over spending in bad years. The extra return also helps fund those additional years.

Hedge against longevity. Immediate fixed annuities can, for a lump sum, guarantee a lifelong payout. But since today's low interest rates mean payouts are small, McClanahan suggests buying in chunks over time. You will get more income, especially if rates go up.

Carolyn McClanahan says her career switch from ER doctor to planner began when she and her husband tried to find an adviser. "They were mostly salespeople who wanted to sell expensive mutual funds," says McClanahan. Frustrated by the lack of good advice and wearying of 12-hour ER shifts, McClanahan went back to school part-time. She still volunteers as a physician.

On the pages that follow are big ideas from some of the retirement-planning world's sharpest minds:

Forget the 4% withdrawal rule: Wade Pfau, professor of retirement income, American College
You'll spend less as you age: David Blanchett, director of research, Morningstar Investment Management
Plan to pay for future health costs: Carolyn McClanahan, president, Life Planning Partners
Plan for the critical first decade: Michael Kitces, partner and director of research, Pinnacle Advisory
Social Security is the best deal: Alicia Munnell, professor of management, Boston College To top of page

Send a letter to the editor about this story to money_letters@moneymail.com.


Join the Conversation
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.36%4.24%
15 yr fixed3.39%3.26%
5/1 ARM3.36%3.27%
30 yr refi4.34%4.22%
15 yr refi3.38%3.24%
View rates in your area
 
Find personalized rates:
Rate data provided
by Bankrate.com
CNNMoney Sponsors
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.