The estimated $215,000 that retirees will spend on health care is beginning to resonate with some retirement savers more than discussions about expected returns and risk tolerance, some advisers say.
Like parents who save specific amounts of money to put kids through college, savers who plan for specific retirement expenses like health care are more likely to reach their goals, said John Skjervem, chief investment officer for Northern Trust's Personal Financial Services Group.
"We're getting more explicit about retirement costs and doing detailed cash-flow projections," Skjervem said. "It's similar to how a corporation looks at its future pension liability."
Of course, guessing future spending needs is just that -- guessing.
Earlier this year, Fidelity Investments estimated that a couple, both 65 and retiring this year, will need $215,000 to cover medical costs in retirement. That includes Medicare premiums, prescription drugs, non-covered services, co-payments and deductibles, but not over-the-counter medicines, dental work or long-term care insurance premiums.
Naturally, if you run into a lot of health problems, live in a particularly high-cost area, or outlive your life expectancy, you could spend far more. Stay healthy or die young and you'll spend far less.
Fidelity offers its plan participants an Internet calculator that can somewhat personalize the health-spending estimate, taking into consideration different retirement dates and current ages.
While these are still just estimates, they provide a basic framework for retirement savers, Skjervem said.
"It's more tangible for clients than traditional talk about standard deviations in a portfolio," he said.
By having savers look at various retirement expenses individually, he said, the overall effect can be that they end up saving more in the aggregate because they realize all their diverse retirement goals will need to be financed.
The idea behind the Fidelity calculator and a new Living Well guide from Northern Trust is to urge consumers to think about long-term health as a personal finance issue. (You can access a copy of the Living Well guide at http://best-health-and-wealth.com.)
"A significant number of retirees told us their state of health is not good, they are spending more in retirement than they ever planned and some were even forced into an early retirement due to health problems," Brad Kimler, senior vice president for Fidelity Employer Services Co., said in a statement. "But if today's workers act now to take greater advantage of the many retirement savings vehicles available to them, they can create a more secure and enjoyable retirement."
"Chances are when most people think about their financial and physical well-being they see them as separate aspects of their lives," Sherry Barrat, president of personal financial services, Northern Trust, said in a statement. "This attitude is changing as people discover that age-related health issues have a direct bearing on their finances."
So, how to go about dividing up your long-term savings without getting bogged down in fees and paperwork?
Northern Trust's Skjervem said that while wealthy families often create individual trusts for specific goals like philanthropy or health-care spending, average savers may find the record-keeping too cumbersome or expensive to justify multiple accounts.
If that's the case, you might simply think of your own piles of money -- the 401(k), IRA, etc. -- as distinct entities, each earmarked for one of your major retirement goals, such as living expenses, health care or philanthropy. If one of those accounts is too large for one retirement goal, consider using subaccounts to place the earmarked assets, he said.
Next, you'll need to think about your risk tolerance in a more divided fashion. For instance, you might take little risk with money earmarked for basic living expenses and health care, and then take on more risk with funds for charitable giving or travel.
An investor's overall comfort level with the investments in the portfolio is still important, however, said Skjervem, because clients still need to be able to sleep at night without worrying about financial markets. "This is about backing into an asset allocation using much greater precision about how [retirement] money will be used," he said. "The more structure you can put on it, the better."
By segmenting the risk, he added, it can also have the effect of causing less panic when markets decline because the pots of money earmarked for necessities wouldn't be experiencing the heavy volatility of the overall market.
source:www.chicagotribune.com
Sunday, July 8, 2007
Health care an important part of retirement saving
Posted by yudistira at 6:18 AM
Labels: health care
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