Though some Americans enter retirement woefully unprepared, many folks do manage to save a decent chunk of cash during their working years. As my colleague Matthew Frankel reported last year, the median retirement savings amount among Americans in their 60s is $172,000. And while that no doubt implies that numerous near-retirees have considerably less than that amount, it means that a fair percentage of workers also have more. And those are the people who are less likely to be financially stressed in retirement -- or so you'd think.
In a recently released study by UBS Wealth Management, 73% of wealthy seniors with $1 million or more in assets say getting sick is their greatest retirement-related fear. Furthermore, over half of wealthy retirees feel insecure in their long-term care planning. And given the cost of healthcare in retirement, their concerns are by no means unfounded.
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Healthcare costs are skyrocketing
Back in the day, retirees were told they'd spend around $250,000 on medical care in retirement, but in recent years, that number has since escalated. According to HealthView Services, a provider of cost-projection software, the average healthy 65-year-old couple today can expect to spend $400,000 or more on healthcare costs throughout retirement. And that's just for healthy couples. If you enter retirement with a known health issue, or are diagnosed with a condition early on, you could very well end up spending even more. Additionally, that $400,000 figure doesn't account for long-term care, which can end up throwing even well-off retirees for a loop.
Long-term care: a huge financial burden
It's estimated that 70% of 65-year-olds will need some form of long-term care during retirement. And without insurance, which many people don't have, that can get expensive very quickly.
The average assisted living facility in the U.S. costs $3,628 per month, or $43,539 per year. Nursing homes, meanwhile, cost $82,125 per year on average for a semi-private room. Want your own private space? That'll set you back around $92,345 per year, which means that if you wind up residing in a nursing home for a solid decade, it'll cost close to $1 million. Ouch.
Preparing for the future
Given the aforementioned costs, it's no wonder so many well-off seniors have concerns about paying for healthcare. But if wealthy retirees are worried about their long-term medical costs, what about retirees with average savings or, worse yet, no savings at all?
Since we can't predict the future, the best most of us can do is read up on the cost of medical and long-term care in retirement, and attempt to save appropriately. For younger workers, that means contributing to a retirement plan as early on as possible. For older workers who get a late start, it means maxing out contributions to catch up.
Currently, workers under 50 can put up to $18,000 a year into a 401(k), and $5,500 into an IRA. If you're 50 or older, these limits increase to $24,000 and $6,500, respectively. And while most folks can't necessarily max out these thresholds over a 40-year period, if you start saving early enough, you won't have to.
Case in point: Setting aside $400 a month for 40 years will leave you with a $1.24 million nest egg, assuming your investments generate an average annual 8% return, which is just below the stock market's average. And that's enough to make a huge dent in the above-referenced costs, or even cover them completely.
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Even if you only have a number of years left in the workforce, if you max out your contributions from this point forward, you stand a good chance of amassing a decent sum. For example, if you were to contribute $24,000 a year to a 401(k) for 12 years and you earn 8% a year on your investments, you'd have $455,000 at the end of the day, which isn't too bad for such a late start.
Another smart way to plan ahead is to look into your options for long-term care insurance. According to the American Association for Long-Term Care Insurance, more than 50% of policy applicants aged 50 to 59 qualify for long-term discounts based on their health. That number drops to 42%, however, among 60- to 69-year-olds, and it plunges to 24% for 70- to 79-year-olds. The longer you wait to apply, the higher a premium you're likely to pay -- that is, if you get approved in the first place -- so if you're serious about long-term care insurance, don't delay.
No matter how much money you save for retirement, there's a good chance medical costs and long-term care will eat up a sizable chunk of it. Plan accordingly, and you'll be less stressed once you're older and retirement becomes a reality.
