How to reduce health care costs when planning for retirement

CFP Life Planning Partners Financial Advisor Dr. Carolyn McClanahan joins Yahoo Finance’s Julie Hyman and Brian Sozzi to discuss financial planning, health care considerations when planning for retirement, rising health care costs, and the health care sector.

Video transcript

- Well, as we look ahead to retirement planning, one of the things that some people might not consider is planning for perhaps declining health in retirement as well. That is what we're going to talk about today with Carolyn McClanahan. She is with CFP Life Planning Partners. And she's not only a financial advisor, she is also an M.D. So she is uniquely qualified, I think, to talk about this issue. So Carolyn, what do you think is the number one thing for people to consider earlier on in their career and keep in mind, not just as they're putting money in their 401(k), but how they should be thinking about financial planning specifically for health issues?

CAROLYN MCCLANAHAN: Well, they first should concentrate on what they can control. And there's two main things that people can control to control their health care costs. And that's their health and their attitude about how they utilize the health care system. And when you think about your health, most people have a lot of lifestyle issues. Half of the population, adult population, has hypertension. A large percentage of people have diabetes.

And if you learn to take care of your health early and you learn to take care of your diseases like your hypertension diabetes early, you can do a significant job decreasing health care costs. I have a great example of a patient that I saw as a doctor. I still practice in a free clinic. He was a construction worker. And he released on the weekend by drinking a 12 pack of beer. And we couldn't control his blood pressure and his diabetes. He was starting to get diabetes. And totally quit drinking. Everything went away. And now he takes no medicine and doesn't have to go to the doctor. So that's a perfect example.

- Carolyn, if I plan to retire at 65, just given how inflation has taken hold in this world, how much money will I need to have set aside to cover my medical expenses?

CAROLYN MCCLANAHAN: People love to try to predict an unpredictable future. We have no idea what health care costs are going to be in the future. Fidelity comes up with these numbers that you have to have a few hundred thousand per person for health care expenses. It really depends on a couple of things. Are you a high health care user or a low health care user? If you're the type of person that likes to go to the doctor all the time as soon as you get a sniffle or a hangnail, or if you like to use a lot of alternative medicine, which is expensive, you need to have a significant budget set aside for your health care expenses.

I had a patient once who she looked like she was 70. And she said to me, I hadn't been the doctor in decades. The woman was actually 98. And she came to see me because she actually had this big thick toenail she couldn't cut. And so she's a perfect example of she shouldn't have saved much money at all for her health care expenses. So that's the first thing you have to look at. And then once you have that money in your budget that you know how much you spend, you need to plan for that expense just like any other expense in retirement.

- When you're younger, you can also, Carolyn, of course, bye long-term care coverage. You can pay into an insurance that will pay for those kinds of issues when you're older. Is that a good option for most people?

CAROLYN MCCLANAHAN: Well, the long-term care industry has been up and down. I've been doing this 20 years now. Policies you bought 20 years ago are a great deal today. But you can't get those policies anymore. So for a younger person, of course, it's always important to make sure that they have disability coverage first and that they're saving appropriately for health care expenses. If you can afford long-term care insurance, then you could buy it. The problem that you have is that's a policy you're not going to use if you buy it while you're in your 40s or early 50s. You hopefully won't use it for another 30, 40 years. And who knows what it's going to look like?

So that's why we, for people who want to buy products, we recommend the life insurance hybrid type products instead of traditional long-term care. Some people would argue with me about that. But the more important thing with planning about long-term care is you got to think about your health. If you have an unhealthy lifestyle and you're not willing to change it-- you've got to plan for who you are and not who you want to be-- your chance of needing long-term care extensively is not real high. It's about two years.

However, if you live a very healthy lifestyle and you're going to live a long time, you have a higher risk of dementia. So your long-term care need would average about five years. So you need to take those things into consideration when you're thinking about buying long-term care products.

- And Carolyn, finally, just take a step back here for the sort of baseline. I mean, everybody is going to get Medicare, presumably, hopefully, by the time they get to retirement. So if people have Medicare, do most people need more than that?

CAROLYN MCCLANAHAN: Oh, absolutely. Medicare has what's called unlimited cost sharing. So there's different parts to Medicare. You have Medicare A and B that you get provided through the government. And that pays 80% of the costs. And so let's say that you have a heart attack and the bill ends up being $100,000, which is not uncommon when you have a massive problem that you're hospitalized for a while, and then you're going to owe $20,000.

So it's important for you to have what's called a Medigap policy and also a Medicare D policy, which pays for prescription coverage. And so it adds to the cost. But if you get significantly ill, you're going to be glad that you have that coverage. Another option is Medicare Advantage, which are cheaper plans. But there are limitations to those. So it's important for people to understand and learn the Medicare landscape before they retire, before they actually have to make that decision.

- And I think most people probably don't. So this is really useful information. Thank you so much for being here. Carolyn McClanahan of CFP Life Planning Partners. Appreciate your time this morning.