“Medical coverage is unlikely to be enough to cover your health care costs in retirement. Ideally, you want to prepare for these costs decades before you retire.”
Let’s not bury the leadership. According to the Fidelity Retiree Health Care Cost Estimate, the average retired couple aged 65 will need to save about $ 300,000 (after tax) in 2021 to cover retirement healthcare costs.
Fidelity has followed this data for years. I describe how retirees can prepare for this in my second book, which is still untitled. (It will likely be in print sometime in late 2021.) I devote a lot of my time to healthcare costs because it can change the way retirees prioritize spending in their golden years. If you have a $ 10 million portfolio, the cost of health care may not have a material impact on your standard of living. But let’s say you’re pulling 5% out of a $ 1 million portfolio. You may think differently when you settle the bill for that one-time family vacation if you pull 5% off a $ 700,000 portfolio now.
What if you don’t even have a portfolio? According to Credit Karma, approximately 21 million Americans held medical debt of $ 46 billion as of April 2021. Anecdotally, we’ve seen all of the people in our community who had to resort to crowdfunding to pay their medical bills. You won’t be surprised to read that two-thirds of people who file for bankruptcy cite medical problems as a reason (some of these problems were related to time off from work). That’s more than half a million families a year. (I’m not giving data that an ideologist can manipulate to relay their narrative, but it’s noteworthy that the numbers were consistent both before and after the Affordable Care Act.)
I am highlighting these points to give you the sense of urgency that you should feel as I urge you to take some action to prepare for retirement healthcare costs. The recommended steps depend a lot on what stage of your life you are in. For example, suppose you are on Medicare. If so, you should resubmit your plan annually as your ailments and medical needs change over the years. I know this sounds annoying and it is, but your financial advisor can do this for you for free.
Full disclaimer, I own a financial advisory firm. It looks selfish (and disgusting) to say, “Talk to your financial advisor.” Thousands of people sign up for themselves every year, and so can you. This is where you can start Medicare.
Keep in mind that Medicare is unlikely to be enough to cover your health care expenses in retirement. Ideally, you want to prepare for these costs decades before you retire. You can begin this preparation by investing in a health savings account (HSA).
An HSA is the only type of account where you can benefit from the tax-deductible contribution and a tax-free distribution to pay medical expenses. This is different from traditional IRAs and 401 (k) s, which can reduce your taxable income for the year you deposit, but you will still have to pay tax when you make the withdrawals.
Unlike traditional IRAs and 401 (k) s, which mandate payouts beyond a certain age, you can grow the investment in your HSA tax-free for as long as you want. If you don’t spend it until your death, your surviving spouse can inherit the account and the same benefits.
My point isn’t that specific about putting your feet to the fire to tweak your Medicare plan or promote HSAs (though I’m a fan of both ideas). My aim is to create awareness, even if that means being the bearer of bad news. Sometimes it’s my job to tell you things you don’t want to hear – for example, that you may not be able to pay for your retirement if you don’t make plans that you haven’t considered. But I don’t want to explain the problem to you, and I don’t want to give you at least one solution.
Speaking of problems: The S&P 500 stock index is currently trading at a price-earnings ratio (P / E) of 20 times the forecast profit for 2022. This forecast is based on current analyst expectations of around 10-12% year-over-year earnings growth for 2022. Is that a lot? Yes it is. The historical average earnings growth is about 6%.
This price multiple is a risk to the stock market. If the Fed gets wrong with inflation, the market is vulnerable. But I think we’re fine with that. However, if the economy experiences a decline in expected growth, the stock market could rebound significantly. I expect gangbuster GDP (gross domestic product) growth for the remainder of 2021.
But I assume that economic growth will be more trending in 2022. I’m afraid it’s too optimistic to expect earnings to grow 10-12% in 2022. I mean things will be fine, but I don’t know how good. The stock market doesn’t like missing out on expectations.
Oh, another problem is that I’m completely out of my element here. Everyone is. On April 1, 2021, analysts expected S&P 500 earnings per share to grow 19.5% for the third quarter and 13.4% for the fourth quarter. As of last week, those expectations are 24.4% and 17.0%, respectively. These rates are so high that I don’t feel like I can do a good job by saying, “Well, maybe 21.7%, but certainly not 24.4% …”
For the rest of the year, I think I’ll be nervous about staying invested in the stock market. And we’ll use that time to see if we can take financial modeling back to reality to see if the S&P 500 deserves a 20-earnings ratio on the high earnings targets for 2022.
But I’m not here to just bring you the bad news. There is good news – the housing market is collapsing! Toll Brothers CEO Doug Yearly notes that “6 million fewer homes have been built in the last decade than in the previous four decades to the 1970s. It is possible that housing construction is just beginning to recover … ”Lennar Chairman Stewart Miller contends,“ New housing construction cannot go fast enough to fill the gap in the production deficit that has persisted for the last decade. ”
That’s pretty good news, especially for housing companies, but it’s also good for the economy as a whole. Housing construction accounts for around 15-18% of GDP. This contribution is made in two ways. First, new structure building and brokerage fees account for 3–5% of GDP. Second, payments related to housing services account for around 12-13% of GDP. Housing is a significant part of the US economy that appears to have long-term tailwinds.
I know that I am worried. Much. It’s my job. Worries aside, I transferred cash to my portfolio last week and put the entire deposit in immediately. Was that the ideal time? Probably not. As I said earlier, I expect the stock market to correct itself. Again. As always. But I don’t seem to have a problem risking my own money in the market today.
Allen Harris owns Berkshire Money Management in Dalton, Massachusetts and manages investments of more than $ 500 million. Unless expressly marked as original research or data collection, some or all of the data cited can be traced back to third-party sources. Unless otherwise stated, any mention of certain securities or investments is for illustrative purposes only. The advisor’s clients may or may not hold the securities discussed in their portfolios. The advisor makes no representations that the securities discussed were or will be profitable. Complete details. Direct inquiries: [email protected]