Investing for Health Care Costs

Much attention has been given to the out-of-pocket health care costs seniors will likely incur during their retirement years. (See our recently published Brief Analysis on this topic.) A Fidelity study found that the average senior retiring this year at age 65 will need $240,000 during his or her lifetime to pay Medicare premiums, out-of-pocket costs, and the like.

But a new study from the Employee Benefit Research Institute finds that depending on gender, those costs could be much higher. For instance:

  • A 65-year-old woman today would need as much as $450,000 during her retirement years for health care costs if she wants to have a 90 percent chance of having enough money for health care.
  • A 65-year-old man would need as much as $378,000 during his retirement years in order to have the same 90 percent chance of having enough money for health care.

For men and women who want to have a 50 percent chance of having enough money, the amounts are lower.

At first glance, it would seem that this study is about health care costs. But I take a slighty different twist: this study is also an indictment on some of the age-old “wisdom” about seniors and investments that typically goes unchallenged, such as:

  • “Seniors should move all their money

    to 'safe' investments when they retire.”

  • “Stocks are too risky and only for young people or the wealthy.”
  • “Annuities are always a good choice because they provide a lifetime stream of income.”

While this type of thinking may be somewhat true, it is also somewhat false. Consider: one of the many reasons that seniors will pay so much for health care costs is because they are living longer. Furthermore, health care costs are increasing faster than inflation and individual health care costs will rise as you age. So consider yourself a long-term investor – think about setting aside some money in investment options that will pay a greater dividend over the long run. Also, don't forget the long-term care insurance.

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