The rising cost of health care and your retirement

Don’t let health expenses scramble your nest egg

The life expectancy of a Canadian born today is over 80 years. The good news is that’s a decade longer than it was in 1960. The bad news? Well, it comes with a cost. Dollars and cents-wise.

We all want to live a long and happy life, but longevity can have a downside. For the average person, at least some of those extra golden years may be plagued by illness or the gradual wear and tear of aging.

And living to a ripe old age can get expensive. Services provided by our public health system 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 in Canada are government-funded, leaving nearly a third of the system reliant on private payments. 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 only poised to increase faster due to our aging population. By 2031, one in four British Columbians – more than 1.3 million people – will be over the age of 65.

BC’s Medical Services Plan (MSP) covers basics like visits to your doctor, preventive screenings, or the cost of a shared hospital room. But it fails to cover a long list of other services you may require, including medications, practitioner services (e.g. massage therapist, chiropractor), routine dental work, vision care, 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 choices 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 roster 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 that out-of-pocket medical expenses can add up quickly, growing larger as you age. For example, a 2017 report by Sykes Assistance Services Corporation on long-term care in BC found that 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.

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 on 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.

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 of 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 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 the age of 60. For a typical 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? Medical advancements mean you’re much more likely to survive a serious health issue, 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, the money could be used to travel for treatment, pay for drugs not covered by health insurance, or buy specialized equipment. It could also help with debt repayment, living expenses, or to simply to make life easier for those around you.

3. Long-term care insurance

Odds are the cost of long-term care will eventually be the biggest financial burden you’ll carry in retirement. Yet, three-quarters of Canadians admit to having no financial plan to pay for it. 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 insurance advisor can explain your options in full.

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.

Retire with peace of mind

When you’re busy paying off a 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.