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.

What will you do?

Apologies

First – apologies for the lack of updates the past couple of Fridays. I was on a retirement test (vacation) and did not complete the weekly updates.

Activities

Ahhh, the dream of leaving the workforce. No more mandated schedule and your time will be your own! Does that leave you exhilarated, scared, excited, or confused, or even all of the above? I am personally in the all of the above category.

In my current state of still working full time, I go to work five days a week where I get:
-playgroup (meetings!)
-snack (breakfast and lunch)
-assemblies (all company meetings)
-individual work time.
I actually get paid to go and have organized activities, although not necessarily of my choosing. Once you are retired, the organization of your day and activities is up to you, and if you do not plan, it may be day after day of daytime TV.

Avoid the void

And there’s the retirement surprise we want to avoid – the retirement activity and social void. You and I need plans for what we want to do and, in some cases, we’ll switch from being paid for your days to paying for our days. As an example, if we want to go to an assembly (perhaps a movie in a theatre) after retirement, we could end up paying for a ticket. An article on CNN Money cited research that noted, “… a 2013 paper by researchers at the University of Exeter Medical School that reviewed numerous studies on the relationship between volunteering and health concluded that volunteers had a lower risk of mortality than non-volunteers, were less likely to feel depressed and had an increased sense of well-being.” Having a plan means you’ll be doing things and doing things will make for a happier, and likely longer, life.  You might drink Coke, because ‘things’ go better with Coke… (perhaps I’ll take up stand-up comedy in retirement!)

Realism

One company I worked for had a policy of ‘realistic previews’ for people entering certain job categories. They had the job candidates complete tasks that were both challenging and related to the work they hoped to be doing. Candidates quickly found that they were suited for the job or that this was not for them. Consider trying the same for retirement. Perhaps you have always planned to make furniture when you retired. If you’ve never made furniture before, perhaps consider some ‘realistic preview’ way of finding out that it is or is not a viable alternative prior to getting a bad retirement surprise.

Maybe you dream of sleeping in until 10:00 AM daily. Not a problem if that’s your dream, but consider trying it next vacation to see if you can sleep that long and to determine how the rest of your schedule might fit with your late sleeping.

What is important to you? Travel, volunteering, kids, grandkids? Put those in the plan. Also, don’t forget to check out the senior discounts for assemblies!

Actions you can take

Actions you can take include:
-Put together a general retirement activity plan that might cover the routine activities for every month. It might include volunteering, grandchild care, movies, lunches with fellow retirees (they don’t happen if someone does not plan them!).  What does a ‘normal’ retirement month look like for you?
-Look at the activities of your retired friends – which ones would you like to use as positive role models and which ones are models for what you don’t want.
-Remember you need your health – do you need to be exercising more and eating less? Should you be more blood pressure medication compliant?
Look for the next update on Friday, September 1 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.