But, the second, and potentially most expensive, unknown financial planning variable is what decent and potentially lifesaving healthcare will cost us in the future. The first vexing element of your long term plans for financial freedom and retirement is: how long you’ll live; and the two are obviously interrelated.
Standard retirement planning uses a Monte Carlo simulation to estimate how long our nest egg will last. To start with, I recommend using Vanguard’s free (and very conservative) calculator at https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf
Play around with portfolio mixes, withdrawal years and rates to see how they affect the projected outcomes.
What we really want to create is a self-perpetuating annuity. By using a withdrawal rate that I can continue – even if we live to be 103. How? With investment return projections about double your withdrawal rate, your portfolio can outpace inflation indefinitely.
But, future health care costs can dramatically affect the amount of passive income we need to sustain a high quality of life as we age. So, how to plan for long term costs based on your unique needs?
Start With the Basics
First, we know that certain healthful lifestyle choices produce better quality of life and lower costs. I know you know that smoking, remaining sedentary and excessive drug use (legal or not) can be counted on to decrease your life expectancy (you’ll need less savings!) and increase your healthcare costs (you’ll need more savings!).
It’s never too late to improve your physical, mental and social habits towards a healthier lifestyle. Use the fitness trackers, trainers and community services now readily available to help live a happier and healthier lifestyle into your golden years.
Then factor in your genetic heritage, cutting edge medical therapies and the impact of advances in Biotech, Nanotech and Robotics will bring in the next few decades and you may be tempted to give up trying to come up with any kind of a plan! But, it’s NOT hopeless and the old axiom:
“Failing to plan is planning for failure”
The best free resource to start with is still http://Livingto100.com. Visit when you have some time to answer the diet, activity, statistical and family history questions to get started on your personal planning. That’s where I got my “high-end” estimate of 103 years old. I’m pretty confident that if my money lasts that long there will be some left to pass on to my great grand kids!
Out of Your Control
In the United States, the medical billing and insurance system will drive us all nuts (so it’s good mental health coverage is now required). The rules change annually and sometimes in between policy years too. All you can do is educate yourself on what’s currently available and resolve to keep abreast of the changes as they occur.
By being your own healthcare advocate, you can decide what level of intervention you want and what you’re willing to pay for.
You can start by joining the ranks of the proactive (about ¼ of American adults) by executing and maintaining a healthcare directive that’s valid in your primary state of residence. Find yours here: http://www.caringinfo.org/i4a/pages/index.cfm?pageid=3289
You’ll also need a durable power of attorney giving a trusted relative or close friend (a proxy or attorney-in-fact) the legal authority to inform medical providers of your preferences if and when you become incapacitated.
Make sure your directive and your designated proxies know how you want to be treated for conditions that require:
- Respiration Machines
- Dialysis and other invasive organ support options
- Feeding tubes
- Resuscitation efforts for heart failure (a Do Not Resuscitate or DNR order)
- Donation of tissue or organs after your death
To insure your wishes are followed, keep the signed and witnessed original document within easy access (not in a bank safety deposit box), make a copy and give it to your proxies, your primary care physician, the local hospital or nursing home and close family or friends.
Ask your doctor or hospital to enter it into your electronic medical records (EMR) and make a wallet sized card (http://www.aha.org/content/13/piiw-walletcard.pdf) to carry with your I.D.
Even when you pass 65 and are eligible for Medicare, your co-pays, deductibles and supplemental care costs can escalate rapidly. Remember that most dental and vision costs are extra, too.
Schedule some time each year during the annual enrollment periods (usually in the fall) to review your coverages, any changes in your health or legal status and your year-to-date expenses. Make a revised budget for the upcoming year and adjust your income sources to match.
My rule-of-thumb is to double the projected general inflation rate and add any individual needs to project medical expenses. A separate medical savings account can help keep funds on hand for an emergency. It should always have enough to cover your annual out-of-pocket maximum.
Rise to the Challenge
We still can’t tell the future but we can take actions that put us in position to control both our healthcare costs and services. Unless you really want to depend on the kindness (and the wallets) of strangers to safeguard your finances and your health, go now and start taking control with a well thought out and executed plan. It’s your life and future at stake.