Ouch – a bad surprise ate my retirement!

Remember – the goal of this blog is to help you avoid bad retirement surprises. Another way to say bad surprise is ‘unplanned significant expense’.  Here is the equation – you can do the math, I promise:

Planned retirement income (and standard of living)   chicken-beach-cartoon-illustration-hen-suntan-cream-34831754

minus bad surprise =

lower retirement income (and lower standard of living) Bus Bench

Real life example

I have a friend who had a bad retirement surprise happen with her healthcare.  She retired with an employer-provided post-retirement pre-65 healthcare plan.  Good news – the employer still provides a pre-65 plan that guarantees coverage.  Bad news – the premiums went up very substantially, which ate into the friend’s retirement income.  Her budget teeter-totter suddenly tilted left.

Budget Teeter Totter-left tilt - v2

There are a few factors at work here:

  • There was a surprise – the friend had an significant unplanned rate increase (think over 50%).
  • Thank heavens the friend is guaranteed fairly good coverage which will help avoid additional bad surprises.
  • Regardless of what you might be paying for healthcare, the overall cost of healthcare in the US continues to inflate, so we can all expect increases, especially as the baby boomer cohort ages.
  • The earlier you retire before 65, when Medicare kicks in, the longer you are exposed to the potential impact of premium surprises. Retire at 59 and increases are potentially a severe problem.  At 63, the problem is potentially less severe because you only have two years until Medicare.

What hints does my friend’s example give us on how to avoid an insurance premium surprise pre-65?  My opinion is that pre-65 retiree health insurance from any source other than a Federal Government plan (FEHB, CHAMPUS) is a risk that could cause either high premiums or lack of coverage.  If you’re not covered under FEHB or CHAMPUS, follow along below.

A budget try-it for you!

Here’s a budget planning activity for you to try, ideally before committing to retirement.

  1. Review how changes in things like insurance premiums might affect your income. Try some scenarios.
  2. Look at your budget with your insurance premiums and other healthcare expenses as planned, then use a stress test or two (or three). What if health expenses went up 25%, 50%, or even 150%? What would it do to your budget and your lifestyle?
  3. Ask yourself how you would pay for the increase. Would it come from savings? 401(k), IRA, or other qualified money? Second mortgage?
  4. Look at what paying for a bad retirement surprise now would do to your long term income plan.

Assuming you found that at some level of increased health insurance (and overall out of pocket healthcare) cost increase your retirement standard of living would be significantly impacted, what are your options? Let’s use an old project management risk planning method to find out.  Our choices are accept the risk, mitigate the risk, or avoid the risk entirely.

  • Accept it – If costs go up, pay the increased cost (perhaps out of retirement savings) and just live with the lower standard of living.
  • Mitigate it – You might search for a cheaper plan and take more risk on yourself (danger here!).  You might go to back to work, primarily for health insurance.
  • Avoid it – Plan to retire later.  Retire somewhere where medical insurance is cheap, like Ecuador.  Seriously, see the Miami Herald Cuenca article.

Actions you can take include:

  • Learn about any pre-65 health insurance your employer offers.
  • As of right now, it looks like the ACA will be going for another year, so if you don’t have a Federal, Union, or employer pre-65 retiree health plan, go on your exchange and see what your costs (remember – premiums + deductibles/co-pays and out of pocket maxes!) might be when you retire. (If you do have a Federal, Union, or employer pre-65 plan, check out those premiums.)
  • Think about what your personal strategy will be for any pre-65 retiree health care.

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

Budget Teeter-totter

WIIFY (what’s in it for you) with this post?  Learn or refresh yourself on budgeting (and its counterpart – actual spending) from the Budget Teeter-totter!

Budget Teeter-totter

Budget Teeter Totter - v2

Budget Teeter-totter quick guide
Green – good – expenses and income in balance.
Red – bad – expenses exceed income.
Yellow – good and bad – income exceeds expenses but may cause ‘surprises’ with income or estate taxes.

Good news-bad news-good news
I’ve got good news and bad news and good news.  The good – you’re retired or thinking about it and want the best you can attain.  The bad – if you’re like 99% of us, you’re going to be on what’s called a ‘fixed income’.  The other good news is that with planning, prioritizing, and budgeting, you can avoid surprises!

Two pieces to planning – income and expenses
Bottom line from this section – know your planned income as it will dictate what you can spend without ‘surprises’. www.ssa.gov has a retirement estimator that you (and your spouse if you have one) can estimate your Social Security benefits. You will also need to estimate your income from any pension and IRAs/401(k)s/403(b)s and don’t forget required minimum distributions (RMDs).  Lotta letters/numbers there…  Frankly, if you don’t do this a lot, you might want to strongly consider a trusted financial professional.  Designation Check can help you find a Chartered Financial Consultant (ChFC) and here’s a place to find a Certified Financial Planner (CFP) finder.   On my personal income side, I include Social Security, a small pension, 401(k), and savings.  I reduce the income by my forecast of Federal and State income taxes.

Bottom line from this section – know your expenses and have a budget that leaves you in the green (or yellow) on the Budget Teeter-totter.  On my expense budget side I include:
-Utilities – gas, electric, water, phone/internet/TV (too much!), cell phone, trash, homeowners association dues
-Forecast medical insurance expenses (if I retire pre-65 COBRA or exchange rates, post-65 a Medicare supplement)
-Property tax
-Car licenses
-Homeowners insurance
-Car insurance
-Personal insurance (life, LTC)

Actions you can take:
-Learn about RMDs. IRS RMD information.
-Start researching your retirement income and/or budget.
-Let me know in the comments or via ‘Contact’ what else you’d like to see in the expenses.

Up next – You’re gonna die! But we can help with a surprise there, too.  Look for the next update on Friday, July 21 at 12:30 PM.

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.