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Covering health care costs in retirement: tools you can use

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I sometimes joke that the two greatest obstacles to a successful retirement are the enormous cost of health care before retirement and the enormous cost of health care after retirement.

Let’s start by talking about the health care costs at a national level. The U.S. spends $3.1 trillion on health care.

That is $10,000 per year for every man, woman and child in the U.S. This is one-sixth of the GDP of our country. And it is equal to the entire GDP of Germany.

Our government now spends more on Medicare, Medicaid and the PPACA than any other expenditure. The Congressional Budget Office says that those costs will continue to increase by 6 percent per year. In other words, those costs will double in just 12 years.

Our economy is only growing at 2 percent, meaning our economy only doubles every 36 years. Health care costs will overwhelm our economy unless something is done — and soon.

Now, let’s talk about health care costs on a personal level. According to the Milliman Medical Index, the average cost of health care for a family of four is $24,671 per year. If current increases continue, that will rise to $50,000 per year by 2025 and $75,000 per year by 2030.

This increases will be a serious issue for baby boomer retirees. How can they save for the cost of health care after retirement when the cost of health care before retirement continues to rise at this amazing rate? 

The issue is especially troubling because health care costs will continue to dominate expenditures after retirement. Studies by Fidelity, the Employee Benefit Research Institute and Healthview Services all find that a married couple will require between $250,000 and $500,000 just to meet health care costs in retirement. And that number is increasing dramatically, as people live longer and spend more time in retirement than ever before.

At the same time, studies have found that 90 percent of Americans have less than $140,000 in savings. What will happen to the quality of life for our retirees in the years ahead? Money must be set aside or created to maintain access to quality health care in retirement. It will be difficult to create the funds — but not impossible. You will have to use all the tools at your disposal.

Start by asking clients an prospects about health savings account (HSAs). Many of our clients use these accounts to build money to pay for health care costs after retirement.

They save in these accounts, in addition to 401ks, IRAs and the other tax-deductible savings plans. They do not use their HSAs until after they retire to pay out-of-pocket health care costs. Tax deferral helps to build an account to pay ever increasing health care costs.

Another way boomers can pay health care costs in retirement is to leverage their parents’ assets. Seventy percent of the wealth of our country is concentrated in the hands of people over 65. If we show those people that we can turn $100,000 into $200,000 of tax-free money for their children and grandchildren without making them give up control of that money, many grandmas and grandpas would do just that.

Candidly, that may be the only way we can help families continue to have access to quality health care. Families must work together as families. And they must do everything possible to keep the money in the family.

You are the only financial professionals who can deliver this opportunity. It is an opportunity that will be missed unless you ask every prospect and client if they understand how important it is to use this wonderful tool called leverage.

You are the solution!

Read also these columns by Van Mueller:

The power of asking the right questions (21 of them)

What women planning for retirement want: income guarantees

Doing right by clients in volatile markets: 3 examples

20 issues to inspire your prospects & clients to take action

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