Planning for the Expense Many Investors Underestimate

When most people think about retirement planning, they focus on the areas that receive the greatest attention from the financial media. Investment returns, market volatility, interest rates, taxes, and retirement income strategies often dominate the conversation. While each of these topics deserves careful consideration, there is another retirement expense that frequently receives far less attention than it should.

Healthcare.

For many retirees, healthcare may ultimately become one of the largest expenses they face throughout retirement. Yet despite its importance, healthcare planning is often treated as a secondary consideration. Many individuals assume that Medicare will cover most expenses and that healthcare costs will remain manageable. Unfortunately, reality often proves more complex.

The challenge is not simply that healthcare is expensive. The challenge is that healthcare costs are difficult to predict. Unlike a mortgage payment or a utility bill, healthcare expenses can vary significantly from year to year. They are influenced by age, medical conditions, prescription drug costs, long-term care needs, inflation, and changes in healthcare policy. As life expectancy continues to increase, retirees may spend decades navigating these uncertainties.

For affluent investors, this creates a planning challenge that deserves greater attention.

A healthy couple retiring today may spend twenty-five to thirty years in retirement. During that time, healthcare needs inevitably evolve. Even individuals who enjoy excellent health throughout much of retirement often experience increased medical expenses later in life. The question is not whether healthcare costs will exist. The question is how those costs will be funded and managed over time.

One of the most common misconceptions involves Medicare.

Many retirees view Medicare as a comprehensive healthcare solution. While Medicare provides valuable coverage, it does not eliminate healthcare expenses. Beneficiaries remain responsible for premiums, deductibles, co-payments, prescription drug expenses, and services that Medicare may not fully cover.1

In addition, Medicare does not generally cover most long-term custodial care expenses.2

This distinction is important.

Medical care and long-term care are not the same thing. Medicare is designed primarily to address healthcare needs associated with illness and injury. Long-term care often involves assistance with activities of daily living such as bathing, dressing, eating, transferring, and personal care. These services can become necessary due to aging, cognitive decline, or chronic medical conditions.

As life expectancy increases, the probability of requiring some form of long-term care also increases. According to the U.S. Department of Health and Human Services, a significant percentage of individuals reaching age 65 will require some form of long-term services and supports during their lifetime.3

For many families, the financial impact can be substantial.

Long-term care costs vary widely by region and level of care required. Home health assistance, assisted living facilities, memory care services, and skilled nursing facilities each carry different cost structures. In some cases, annual expenses can reach tens of thousands of dollars. In others, costs may exceed six figures annually.

The objective is not to create fear. The objective is to acknowledge reality.

Retirement planning should address both the expected and the unexpected. Ignoring a potential expense does not eliminate the risk. It simply increases the likelihood that the risk will create future challenges.

Healthcare inflation adds another layer of complexity.

Historically, healthcare costs have often increased faster than general inflation.4 This means that healthcare expenses may consume a larger portion of retirement income over time. A retirement plan that appears sufficient today may encounter additional pressure if healthcare expenses grow faster than anticipated.

For high-net-worth investors, this presents an interesting dilemma.

Many affluent retirees possess the financial resources to absorb moderate healthcare expenses. However, substantial healthcare events can still affect estate planning objectives, charitable goals, family gifting strategies, and legacy plans. Even significant wealth can be impacted when large healthcare expenses persist for extended periods.

This is why healthcare planning should not be viewed solely as a budgeting exercise.

It should be viewed as a risk management exercise.

Just as investors diversify portfolios to manage investment risk, healthcare planning seeks to manage the financial uncertainty associated with future medical and long-term care expenses.

Another area frequently overlooked involves Medicare premium adjustments.

Many retirees are surprised to learn that Medicare premiums can increase based upon income levels. These adjustments are known as Income Related Monthly Adjustment Amounts, commonly referred to as IRMAA.5

For higher-income retirees, IRMAA may result in increased Medicare Part B and Part D premiums. Strategic retirement income planning can sometimes help retirees better understand how various income sources affect these thresholds.

This illustrates an important point.

Healthcare planning and tax planning are often interconnected.

Retirement account withdrawals, capital gains, Roth conversions, pension income, and other sources of income can influence both tax obligations and Medicare premiums. Viewing these decisions in isolation may result in unintended consequences. Coordinated planning helps investors evaluate the broader impact of financial decisions across multiple areas of their retirement strategy.

Another challenge many retirees face is healthcare decision-making itself.

The healthcare system can be complex. Medicare choices, supplemental coverage decisions, prescription drug plans, provider networks, and long-term care considerations often require ongoing evaluation. These decisions become increasingly important as healthcare needs evolve.

Many individuals spend years preparing financially for retirement while devoting little time to understanding how healthcare decisions may affect their retirement experience.

Education matters.

Understanding available options before they become necessary often leads to better decisions and greater confidence.

Family considerations also deserve attention.

Healthcare events rarely affect only the individual receiving care. Spouses, children, and other family members often become involved in caregiving, decision-making, transportation, advocacy, and financial support. As a result, healthcare planning frequently becomes family planning.

Open communication can play a valuable role.

Discussing preferences, expectations, powers of attorney, healthcare directives, and caregiving wishes before a crisis occurs can reduce uncertainty and emotional stress for loved ones.

These conversations are not always easy. They are, however, important.

One of the greatest gifts retirees can provide their families is clarity.

Clarity regarding healthcare preferences.

Clarity regarding financial resources.

Clarity regarding decision-making authority.

Clarity regarding expectations.

Unfortunately, many families postpone these discussions until circumstances force them to occur.

The strongest plans address these issues proactively.

As financial advisors, we often spend considerable time discussing investment performance. Yet some of the most meaningful planning conversations involve topics that have little to do with market returns. Healthcare planning falls squarely into that category.

A successful retirement is not defined solely by portfolio performance. It is defined by the ability to maintain independence, dignity, flexibility, and financial confidence throughout life’s various stages.

Healthcare plays a central role in achieving those objectives.

At PFS Wealth Management Group, we believe retirement planning extends beyond investments. It includes income planning, tax coordination, estate planning, healthcare considerations, and preparing for life’s inevitable transitions. The goal is not to predict future healthcare needs with precision. The goal is to build a framework capable of adapting as those needs evolve.

If there is one healthcare planning question worth asking, it is this: If your healthcare needs changed significantly tomorrow, would your financial plan be prepared to respond?

For many retirees, that question deserves thoughtful consideration.

We offer a comprehensive planning review designed to help individuals and families evaluate retirement income, tax planning, healthcare considerations, estate planning, and long-term financial objectives. To learn more, visit www.pfswealthgroup.com or email info@pfswealthgroup.com to schedule a conversation. Bringing extraordinary value to extraordinary families each and every day starts with a plan designed with purpose.

Required Disclosure:
Insurance products are offered through the insurance business PFS Wealth Management Group. PFS Wealth Management Group is also an
Investment Advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor. AEWM does not offer insurance products. The insurance products offered by PFS Wealth Management Group are not subject to Investment Advisor requirements.

Investing involves risk, including the potential loss of principal. Any references to protection, safety or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. This radio show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.

PFS Wealth Management Group is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the U.S. Government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by PFS Wealth Management Group. 04115784-06/26

 

References

[1] Medicare.gov. Medicare Costs at a Glance.
https://www.medicare.gov/basics/costs/medicare-costs

[2] Medicare.gov. Long-Term Care Coverage.
https://www.medicare.gov/coverage/long-term-care

[3] U.S. Department of Health and Human Services, “Caregiver Resources & Long-Term Care.”
https://www.hhs.gov/aging/long-term-care/index.html

[4] U.S. Bureau of Labor Statistics. Medical Care Consumer Price Index.
https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

[5] Social Security Administration. Medicare Premiums: Rules for Higher-Income Beneficiaries.
https://www.ssa.gov/benefits/medicare/medicare-premiums.html