Some people approach retirement planning like an extended math problem. Frankly, many financial advisors do as well and with good reason. There are so many “unknowables” that the only way to wrestle the decision to the ground is to make some general assumptions and then follow them down the line.
For instance, in no particular order you might first ask yourself, how long are you going to live? This obviously is critical to the rest of your analysis. If you need to save for another 10 years this is dramatically different than saving for another 25 or 30. You might base your calculation on the average longevity of close relatives or after considering your own health and medical conditions. In the alternative you might use an actuarial chart or average age of men or women living in your area or in your socioeconomic condition. In any event you could finally settle on a mental image of how long you expect to live.
Next, you could consider your assets, your life style, your guaranteed income and your likely income from investments based on reasonable calculations taking into account inflation and reasonable rates of return. At this point you might be working with a financial advisor.
For those who plan for retirement there is also a commonly used factor referred to as the Income Replacement Ratio or IRR. The idea is you expect to retire on a given percentage of what was your pre-retirement income. For instance you could anticipate living on 80% of what you earned before retirement. The assumption is that certain work-related expenses may reduce or drop entirely on retiring. These might be related to clothing allowance, transportation costs, payroll taxes including contributions to Social Security and so on.
Here is the thing. Every analysis is only as good as the assumptions on which they are based. A few years ago an organization, HealthView Services, estimated that the anticipated costs in retirement and the planning tools used to measure them did not give adequate weight to retiree health care costs. See online publication, Next Avenue, www.nextavenue.org/why-your-retirement-spending-estimate-is-wrong/. At the time the Next Avenue article was published in 2015, Ron Mastrogiovanni, the CEO of HealthView Services noted that “Income Replacement Ratios…normally assume that household expenses in retirement will rise with overall inflation—by about 2.5 percent to 3 percent a year… But HealthView Services forecasts health care costs (including Medicare Part B premiums) to rise about 6 percent annually for the next 10 years. Medicare Part D premiums for prescription drugs, which have been growing by about 12 percent a year, will climb an average of 8 percent a year over the next decade…”
The article went on to note that “it gets worse,” and then describes what is known as IRMAA, the Income Related Monthly Adjustment Amount for higher income individuals and couples. IRMAA adds a surcharge to Medicare B and Medicare D premiums based on your income from two years’ prior. The first cutoff in 2020 is $87,000 for a single person and $174,000 for a married couple. If you are still working and collecting Social Security it is not too hard to reach these amounts.
Another development is that fewer employers are offering health insurance benefits to their retirees.
What To Do. One of the first considerations is to budget more for retirement health care needs than might be reflected in the average table or software program. Another option that has been considered by many is to continue working if by doing so they maintain health insurance coverage. Sometimes one spouse continues to work and the other “retires” largely because health insurance benefits are offered to both wife and husband through the company employing one of them. Even if there is no continuing health insurance, you might by projecting costs, decide to continue to work even if just parttime to cover projected healthcare costs.
Another consideration especially for those who are just at the brink of age 65 (Medicare retirement eligibility continues to be at age 65. It is Social Security where age has been rising) is to think long and hard before choosing a Medicare Supplement or Medicare Advantage plan. Medicare Advantage tends to be less expensive initially but some Medicare Supplement plans are better for extreme illness. Seek help if you are unsure.
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.