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June 2018

The Rising Cost of Health Care and Your Retirement

Don’t let health expenses wreck your nest egg.

Choosing a credit card The life expectancy of a Canadian born today tops 82 years. The good news is that’s a decade longer than in 1960.

But a lengthy life span has a downside. For the average person, at least some of those extra years will be spent in failing health, either because of sudden illness or the gradual wear and tear of aging.

Living to a ripe old age can get expensive. Services our public health system provides could fall far short of what you’re expecting. It’s left to you to make up the difference. That can strain your resources. The answer? Plan ahead, so rising health care costs don’t derail your retirement.

Don’t underestimate future out-of-pocket medical expenses

Approximately 70% of health care costs are government-funded, leaving nearly a third of the system reliant on Canadians to pay for privately. According to the Canadian Institute for Health Information, between 1988 and 2015 out-of-pocket health expenditure per person grew at 4.5% annually, more than double the rate of inflation. Those costs are poised to only increase due to our aging population. By 2031, one in four British Columbians will be over age 65. That’s 1.3 million people, roughly the population of Manitoba.

The Medical Services Plan covers the basics like visits to your doctor, preventive screenings or the cost of a shared hospital room. It leaves a long list you’re normally responsible for including medications, practitioner services (e.g. massage therapist, chiropractor), routine dental work, eyeglasses, as well as wheelchairs and other medical equipment.

Figuring out the costs

How much you’ll wind up spending on your health in retirement boils down to two factors: lifestyle choice and medical need.

When you’re newly retired, your biggest worry might be an occasional dental bill. Later, to remain independent, you might have to renovate your home or pay for regular visits by a home care worker.

On the other hand, if you stay relatively healthy and simply want more freedom to enjoy life, you could choose to downsize to a retirement residence offering meal preparation, cleaning services, as well as a full menu of social and recreational opportunities.

But, inevitably, as your health needs become more complex, long-term care may be your only option.

The reality is out-of-pocket medical expenses can add up quickly, growing larger as you age. For example, if you elect to add extra home support beyond what the public system provides, you could easily pay $50 per hour for nursing services and $125 per hour for physiotherapy. Long-term care can run you substantially more – as much as $10,000 per month, or more, if you want to stay in a private facility.1

The impact of health care costs can also touch other areas like your estate plan. Dollars committed to medical expenses could severely deplete the legacy you hope to pass down to your heirs. Those potential costs should also make you think twice about distributing too much of your wealth too soon.

How will you pay for it all?

Unplanned health care expenses can compromise your finances by forcing you to either drain your savings prematurely or rack up debt to pay your bills. There’s a risk even if you’ve been diligent about putting money away for retirement. It’s been argued retirees capable of replacing 80% or more of their income can still expect a meaningful hit to their living standard once they fund long-term care.2

What choices do you have to pay for it all? One option is to self-fund health care by incorporating a health savings component into your broader retirement savings plan, so the money will be there when needed. Also, identify discretionary expenses you could cut if necessary to free up extra funds.

But, earmarking money for health care has its shortcomings. You may be struck by a sudden illness, before you’ve had a chance to save sufficiently. A health issue could turn out to be more serious than you expect. Or, you might not be able to put enough aside for both you and your spouse.

A sensible alternative to self-funding is to put insurance in place to take care your short-term and long-term medical needs. Here are three ideas worth considering:

1. Transition health benefits from your employer. If you’ll be heading into retirement soon, now’s the time to ask about continuing the extended health and dental coverage you enjoyed as an employee.

Your employer may offer a retiree health benefit package you can opt into. Retiree benefits have become a pricey perk, so don’t be surprised if you’re asked to cover at least part of the cost.

If a retiree plan isn’t available, there could be a "roll over" option, where for a limited time after retirement you can convert your coverage from your employer’s group insurance into a new personal policy without submitting medical data. That’s valuable if your health status might complicate an insurance application.

Another route is to apply for individual health and dental insurance. Premiums depend on your age, medical condition and the level of coverage you choose. If you’re unsure how much to buy, it’s sometimes better to go with enhanced benefits from the start. Why? You can easily reduce coverage if you don’t need it. Conversely, trying to add more protection later means a medical review and possibly higher premiums.

2. Critical Illness Insurance. As you get older there’s an increasing probability you’ll face a life-threatening illness like cancer or heart disease. Statistics from the Heart and Stroke Foundation reveal that 80% of all strokes happen in people over age 60. For an average 45-year-old couple, there’s greater than a 61% chance at least one of them will suffer a serious health issue by age 70. Those odds jump to nearly 91% by age 95.3

What’s different today versus a generation ago? You’re much more likely to survive a health scare, which can mean incurring sizeable expenses on the road to recovery. Critical illness insurance can help. It pays a one-time lump sum if you’re diagnosed with one of the ailments listed under the policy.

A key benefit is you can spend the proceeds any way you wish. For example, travel for treatment, pay for drugs not covered by health insurance or buy specialized equipment. Use the money for debt repayment, living expenses, or to simply make life easier for those around you.

3. Long-Term Care Insurance. Odds are the cost of long-term care will eventually be the largest financial burden you’ll carry in retirement. Yet, three-quarters of Canadians admit to having no financial plan to pay for it.4 Long-term care insurance is one solution. It provides tax-free dollars for your care, either at home or in a care facility, if you’re no longer able to look after yourself due to physical or cognitive impairment.

What’s covered? Costs for daily activities such as bathing, meals and dressing, cleaning services, as well as skilled nursing care, rehabilitation and therapy. In some instances, it may be advantageous to choose a policy which bundles long-term care coverage with critical illness or life insurance protection. Choosing a plan with a “return of premium” option, can also be a source of forced savings for future emergency or medical costs. Your advisor can explain your options.

No matter what kind of health-related insurance you’re considering, a general rule is you’ll pay lower premiums and find it easier to qualify the younger and healthier you are, so it’s smart to plan early.

Under 35? Don’t ignore life insurance.

While older folks might overlook future health care costs, younger people often do the same with life insurance. Even if you don’t have dependants, adding life insurance to your financial toolkit may be a wise move. Here’s why.

Help your partner keep your home and lifestyle. If you’re carrying a hefty mortgage and pass away, the financial load could be too much for your partner to manage. Life insurance proceeds can take care of mortgage debt, student loans and other obligations, and at the same time replace your lost income.

Protect your co-signers. If mom and dad have guaranteed your debts, they’re still obliged to pay those debts if something happens to you. A life insurance policy can deal with what’s owing.

Acting early can save you money. In general, life insurance is cheapest and easiest to get when you’re young and healthy. You might be single or without kids now, but that could change. By purchasing a policy today, you lock in a lower premium than if you wait until you’re older or your health declines.

Protect what you’ve worked for. Disability and critical illness insurance are designed to ensure a continuous income stream if you are unable to work for an extended period of time. In some ways, they are just as important as life insurance. Why? Your chances of becoming disabled, either temporarily or permanently, far outweigh your chances of dying prematurely. Without the right insurance, a serious injury or illness could create financial challenges that add further mental and emotional stress at a time when energies need to be focused on improving your physical health.

Retire with peace of mind

When you’re busy paying off the mortgage, saving for your kids’ education and taking care of everyday bills, juggling immediate needs makes it easy to lose sight of risks that lay ahead.

Your BlueShore Financial advisor can help you explore smart ways to protect you and those you care about from the threat of rising health care costs, so you can retire with peace of mind. Ready to learn more? Contact us today for an appointment.

Insurance services provided through BlueShore Wealth.

1Sykes Assistance Services Corporation, Long Term Care in British Columbia 2017. Based on median hourly rates in Vancouver.

2Health Care of Ontario Pension Plan, The Cost of Long Term Care: Canada’s Retirement Savings Blind Spot, February 2018.
3Sun Life Financial, 2017.
4Canadian Life and Health Insurance Association, A Guide to Long-Term Care Insurance.

The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice.
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