Planning for Healthcare Costs
When most pre-retirees I sit with picture retirement, they picture travel, time with grandkids, and finally sleeping in past 6 a.m. What they don't picture is the medical bill that arrives in year fourteen.
That bill is not a long-shot risk. It is a feature of how retirement spending actually behaves.
Real-world retirement spending rarely runs flat. It tends to follow what researchers call the “retirement spending smile” — discretionary spending eases as people slow down, then ticks back up later in life as health and long-term care needs grow. Planning around a flat average ignores the second half of that curve.
Healthcare inflation runs hotter than the rest
General inflation is hard enough on a fixed income. Healthcare inflation has historically run hotter than the broader CPI, which means the medical bill in year twenty is a bigger problem than the math at age 65 suggests.
The danger is what happens if you try to fund those bills entirely out of an investment portfolio. A health shock that lands during a market downturn can force you to sell assets at a loss to pay for it. That is sequence-of-returns risk in plain terms — selling at the wrong time permanently reduces what your portfolio can recover to. Health spending and bad markets do not coordinate their timing for your benefit.
True liquidity, not just technical liquidity
This is why I separate two ideas with clients: technical liquidity and true liquidity.
Technical liquidity means you could sell something to raise cash. The portfolio is liquid, but tapping it during a downturn is expensive. True liquidity means having reserves specifically earmarked for surprises — assets that are not correlated to the market, so drawing on them does not damage the core income plan. Cash reserves, the cash value of a permanent life insurance policy, or a standby reverse mortgage line of credit may serve as buffer assets, depending on your situation. Whether any of those is appropriate is a personal question, not a universal answer.
The cognitive piece
Healthcare planning is not only about hospital bills. It is also about who is making the financial decisions when one spouse is no longer able to. Research suggests that financial decision-making capacity tends to decline with age, often unevenly between spouses. If the spouse who runs the finances is the one who steps back first, the survivor can be exposed at the worst possible moment.
A plan that automates as much as possible — a guaranteed income floor for essentials, simple withdrawal rules for the rest — protects the household when the day-to-day brain space for finance gets smaller.
A resilient plan does not hope for good health. It prepares for what is statistically likely.
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