Advisor Intelligence

Healthcare Costs in Retirement a Scary Mystery

Baby Boomers are terrified about the effect of health care costs on their retirement, according to a new study by Nationwide Financial. And they should be. The study showed pre-retirees have substantial misconceptions about the coverage under programs like Medicare and the Affordable Care Act.

“America’s workers are increasingly concerned about how they will fund their health care costs in retirement,” says John Carter, head of retirement plans at Nationwide Financial.

In a survey of over 800 of U.S. individuals over 50-years-old, Nationwide found most Boomers have trouble predicting their annual healthcare costs. Of those that can, they estimate they will spend $4,300 annually on out-of-pocket health care expenses. But that’s a drastic underestimation, Nationwide says. According to the Employee Benefit Research Institute’s 2012 study, U.S. retirees will spend an average of $11,320 on yearly costs over a 25-year span.

 

The disparity between reality and estimates is due, in part to Boomers’ misunderstanding of their coverage. According to Nationwide, 51 percent of pre-retirees planning to enroll in Medicare believe the program will cover more than 60 percent of their healthcare costs. Even among those retirees already enrolled in Medicare, 56 percent believe the program will cover over 60 percent of costs.

And while most pre-retirees surveyed predict they will use Social Security and personal savings to pay for long-term care, 47 percent say they will rely on Medicare.

Yet Nationwide estimates Medicare only covers about 51 percent of healthcare expenses and does not cover long-term care costs, generally considered to be the most expansive portion of healthcare costs. The newly implemented Affordable Care Act also does not provide long-term care support, but 46 percent of Boomers surveyed said they didn’t know if it did or not.

“Boomers can’t count on the Affordable Care Act or Medicare to pay their long-term care costs in retirement,” says Kevin McGarry, head of the Nationwide Institute. While the Affordable Care Act has little actual impact on retirement plans, it is a concern among pre-retirees, 56 percent of which think the implementation of the law will increase healthcare costs.

“This is such a great time for advisors to have a discussion about healthcare costs in retirement with clients,” Carter says. With the level of uncertainty and misunderstanding surrounding these topics, advisors can provide clarity and comfort for clients.

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