401(k) Healthcare

Getting There and Back

Recently I was listening to an audio file of one of my mentors Jim Rohn. If you don’t know who Jim Rohn is, he’s worth getting to know, but only after you finish this article. His legacy still lives on through recordings on YouTube or curated materials that may be purchased through Success Magazine. Even though he passed many years ago. His teachings are timeless. The truths he spoke are so simple that they are easily overlooked and neglected.

The segment I was listening to was Jim talking about how to design a life you want, and making plans to get where you want to go. During the talk, he paused to tell a story about an experience he had at a gala where Neil Armstrong was the keynote speaker.

Jim said that during Neil’s speech he talked to the audience about overcoming challenges.  Then he went on to use the challenges of getting to the moon and back as an example.

According to Jim, Neal said it was just a matter of identifying and solving a couple of problems.

  1. Problem number 1: How to get to there.
    1. They had to figure out a way to get people to the moon. They had to figure out how to escape earth’s gravity and navigate to the moon’s surface.
  2. Problem number 2: How to get back.
    1. They had to figure out how to leave the surface of the moon and navigate back into earth’s atmosphere.

Overcoming this challenge of getting to the moon and back was simply a matter of solving these two problems.

Then Neil went on to caution the audience, “It’s important that you don’t leave until you have solved both problems.”

Aside from taxes, healthcare will be one of the largest headwinds you’ll face in retirement. The cumulative costs associated with healthcare in retirement may be a determining factor in whether you can afford to retire comfortably. Ignoring these costs is a bit like leaving for the moon without any plan on how to get back.

Expenses like Health insurance, Medicare premiums, and co-pays are real expenses you can expect in retirement. Spending shocks related to long term care events are highly probable yet unknown wildcards. All of these expenses are identifiable challenges to a successful and rewarding retirement lifestyle. Failing to plan for them is a likely plan to fail.

You become eligible for Medicare the year you turn age 65. There’s a 7-month window to sign up. It includes the month you turn 65, the three months prior, and the three months after. This is your initial enrollment period for Medicare. Although Medicare premiums may be less expensive than plans on the individual health insurance market, it’s cumulative components are not free.

The various parts that make up for Medicare, as well as supplement and gap plans carry premium costs, and co-pays. All of which can add up to hundreds of dollars per month and need to be included in your retirement income budget.

What may seem like a small insignificant monthly expense will add up over time. Cumulatively over a 25-year retirement, a married couple can rack up hundreds of thousands of dollars in foreseeable expenses. We’re not talking about spending shocks from major medical issues. These are just the premiums and co-pays for basic healthcare coverages.

Healthcare costs are on the rise too. Many of the cost associated with healthcare in retirement are expected to outpace inflation. Some estimates are as high as 5 to 7% annually. Ignoring these costs in a written retirement income plan could be a recipe for disaster. As more household income shifts to cover rising healthcare expenses there may be less left over to enjoy.

What if you or your spouse want to retire before age 65?  Typically, your access to employer’s healthcare plan ends with the termination of employment. Often times married couples want to retire at the same time. One spouse may be eligible for Medicare. However, unless both spouses in a couple are the exact same age it’s not uncommon for the younger spouse to be ineligible for Medicare at the time the oldest spouse’s eligibility.

What do you do when the younger spouse is not yet eligible?  The younger ineligible spouse will have to buy individual health insurance. The cost of an individual plan can be upwards of $1,000 a month or more. This expense must be planned for until the second spouse is eligible for Medicare.

Many hard-working Americans aspire to retire prior to age 65. However, the cost of individual health insurance can be a large deterrent. A husband and wife under age 65, and in eligible for Medicare should plan to pay more than $24,000 per year after tax in insurance premiums and co-pays.

Let’s look at an example of how costs can quickly add up. We’ll use a couple with a 3-year age gap between the two spouses. They are planning to retire when the older spouse reaches age 62. They will pay a 5% state income tax, and a 15% federal income tax. Ignoring co-pays, and inflation for this example the following demonstrates how quickly premium costs can add up.

For the first three years, from the time the oldest spouse is 62 until the oldest spouse is eligible for Medicare, they could expect to withdrawal $90,000 of pre-tax distributions from qualified plans like IRAs and 401Ks. This is necessary just to pay taxes and have enough left over to pay for healthcare premiums.

For the subsequent three years after the first spouse is eligible for Medicare the second spouse still needs individual health insurance coverage. At $1,000 per month in premium cost they can expect to draw another $45,000 in order to pay taxes and have enough left over to cover individual health insurance premiums for the younger spouse. In all, the cost for individual health insurance coverage for this couple retiring early could be $135,000 or more prior to both of them turning age 65.

Healthcare spending shocks should be accounted as well. Unplanned medical issues requiring specialize long-term care services could deplete retirement savings more rapidly than expected.

While costs vary depending on where you live, in Iowa these are reasonable monthly expense expectations according to Long Term Care Insurance provider Genwworth. (

Nursing Home: A semi-private nursing home room can cost nearly $5,741 per month. Don’t want to share a room with a stranger? A private room will cost closer to $6,235 per month.

Assisted Living: A one-bedroom unit can cost over $3,736.

Home Healthcare: In home care from a health aide may cost $4,576.

Retirement should be an exciting time. You’re embarking on the longest vacation of your life. However, failing to plan for the rising cost of healthcare, and potential unplanned spending shocks could result in a less than desirable outcome.

Thinking back to Jim Rohn’s story about Neil Armstrong, I wonder what Neil’s advice about retirement planning might be for those thinking about their future. Perhaps Neil’s advice to employees planning to retire this next year might go something like this.  Just solve a couple problems.

Figure out how to replace:

  1. The necessary after-tax Income to maintain your lifestyle
  2. ..and, how to cover your expected and unexpected healthcare expenses

Just don’t leave until you’ve solved both problems.

A plan that fails to account for healthcare related costs in retirement may leave you stranded on the moon.

“Investment Adviser Representative of and advisory services offered through Royal Fund Management, LLC, a SEC registered investment adviser.”

Leave a Reply

Your email address will not be published. Required fields are marked *