Have You Saved Enough to Survive Health Shocks in Retirement?

To be prepared against surprise is to be trained. To be prepared for surprise is to be educated.
–James Carse

Most people who are reading up on how much they should have saved up to be able to retire find out fairly quickly about SAFEMAX, which is the amount that they can withdraw from their savings, adjusting for inflation each year, and not run out of money.

There are those who plan for early retirement by trying to live as minimalist of a life as possible and saving the bare minimum to get to the SAFEMAX for their minimalist lifestyles, otherwise known as LEANFIRE. Of course, there are those who just horrifically undershoot the mark in the first place, but that is another discussion for another day.

By planning whatever lifestyle you have and then assuming annual growth by inflation, you are running a significant risk of running out of money in retirement.

You won’t run out of money because you’ve not planned for stock market swings.

Why You Might Run Out of Money in Retirement Even if You Saved 25 Times Your Annual Expenses

Instead, as research by MIT’s James Poterba and Dartmouth’s Steven Venti shows, it does not take a significant health event to drain up to $350,000 from your nest egg.

These two researchers researched ten different health events and their effects on the wealth of 65 and over households.

They found that a 65 year old man will need to spend $72,000 and a 65 year old woman will need to spend $93,000 to have a 50% chance of being able to cover all post-retirement health expenses.

That means that a married couple will need an additional $165,000 above and beyond what they had saved up for SAFEMAX in order to have a 50% chance of being able to pay health expenses.

That’s why the authors cited up to $350,000 in expenses. If you have a health event that is costlier than the average health event, then you’re much more likely to bump up against the higher numbers cited in the research.

This analysis was based on retirees reporting health related events and their appurtenant expenses between 1996 and 2014. So, therefore, that number may even be low, as, by the time you read this article, several years’ worth of healthcare inflation have been added on to those numbers.

While the conditions themselves, aside from lung disease and stroke, did not necessarily lead to the declines in wealth, it was the immediate impact of those health conditions that did. Namely, hospitalization and long-term care were the biggest drivers of declines in wealth.

As we saw in “Long Term Care Insurance,” many people believe that Medicare will cover them in the event of extended hospitalizations or long-term care, but it quickly runs out, leaving the sick to fend for themselves or spend themselves into penury.

In the research, the researchers found that only 32% of respondents had private health insurance beyond government-provided Medicare (I recommend paying for Medicare Part B), and only 6% have long-term care insurance.

Those who were covered by long-term care insurance had, on average, $44,807 more in wealth after nursing home entry than those who were not.

Once again, like we saw in “Whoa, Whoa, Whoa…Aren’t You Overreacting to the COVID-19 Pandemic,” we’re pretty bad at planning for and understanding low-probability, high-impact outcomes. Namely, we underestimate the probability of a “rare” event happening, and we underestimate its impacts.

That’s why I make the recommendations that I do for how much to save in addition to having your regular annual expenses saved up for SAFEMAX.

How much do I recommend?

You’ll have to read my FIRE Playbook to find out.

Are you prepared for a medical financial shock in retirement? Let’s talk about it in the comments below!

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Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

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