What is the Biggest Budget Risk You Face?
When it comes to financial planning, we tend to focus on things like investing choices, debt management, and an enjoyable retirement. What too many people forget about is healthcare. Read on to find out why this might be the single biggest budget risk you face — regardless of your age.
The financial cost of medical emergencies
We all know that medical costs can reach incredible heights — the US has the highest per capita healthcare expenditure of the OECD economies.1 But did you know that as of 2010, about 40% of Americans were having trouble paying their medical bills?2
In fact, medical costs are the leading cause of personal bankruptcy filings, according to a 2014 Northeastern University study looking at bankruptcies between 2005 and 2013.3
While mandatory health insurance seems to help (the Northeastern study investigated the effect of mandatory health insurance in Massachusetts, which reduced medical bankruptcies significantly), it’s not a cure-all.
That’s because medical costs can be extremely high even for patients who have health insurance. For example, one study found that the required co-payment for a powerful leukemia drug ranged from zero to $4,792 for a 30 day supply.4
A major health scare — whether it’s cancer, another major illness, or an accident causing disability — can burden patients in other ways, too. Sickness or injuries might result in lost income, a derailed career, or even an inability to go back to work. That means it isn’t just prudent to be prepared for a health crisis, but also for the potential aftershocks.
So what do I do about medical emergencies?
As a start, make sure you have a thorough understanding of your health and disability insurance — and consider getting enough coverage to minimize the potential fallout from a medical emergency.
If you do have face high out-of-pocket costs, be prepared: think about maintaining liquid savings that could help cover at least most of your potential fees. Disability insurance can also be useful in these situations, depending on your personal financial plan.
Also, consider making your healthcare savings account an addition to your base emergency savings fund, rather than merging the two. A health crisis could go hand-in-hand with lost income or reduced job prospects, which means you might need to cover far more than just medical costs.
The specter of long term care
For retirees, there’s another healthcare issue worth thinking about: long-term care. It’s estimated that 70% of retirement-age adults could need long-term care services at some time in their lives.5
Of course, this might just involve a quick stint in a nursing home to recover from an injury or surgery. But it could also be a longer period in assisted living, or even an end-of-life stay. This is a subject that no one wants to think about, but it’s a looming reality for many retirees.
Genworth Financial estimates that the average annual cost of nursing home care in a semi-private room was $80,300 in 2015 — a price tag that’s grown at an average of 4% per year for the past 5 years. Assisted living costs and home health costs are lower (averaging in the low- to mid- $40,000s), but they are by no means insignificant.6
Medicare does cover certain categories of long-term care, but this coverage is by no means comprehensive.7 Unfortunately, many retirees either don’t know about the limits or are simply unprepared for the possibility of needing long-term care.
How should I handle long-term care?
If you’re approaching or already in retirement, sit down and think about what you would do if you or your spouse needed long-term care. If the need for assisted living comes on the heels of a major illness or injury, you could be facing the double impact of both high out-of-pocket medical expenses and the need for assistance later on.
There are two major options for financing long-term care. You could choose to self-insure by allocating some of your savings to long-term care needs, or you could purchase a long-term care insurance policy.
If you decide to self-insure by saving money, think through the numbers or speak with an advisor — you’ll want to prepare for the possibility of high expenses without opening yourself up to the risk of draining your savings. If you’re thinking about buying insurance, carefully study your potential policy and weigh the risks of coverage. Some insurers have strict rules about what they’ll pay for or may have large rate increases from one year to the next, reducing the potential benefits to you.
Anticipating healthcare risks
One thing that everyone, regardless of age, should do is this: think about what you would do if a medical emergency hit your family. Do you have the appropriate balance of savings and insurance coverage to get through? Do you know what resources you could draw upon to pay for medical or living expenses? If you’re not sure of the answer (or the answer is bleak), now is the time to start making a comprehensive financial plan.
This is one of those plans that you hope you’ll never need to use. But if you ever do, you’ll be grateful that you took the time to put your ducks in a row.