The Planner's Perspective: Budgeting for Healthcare Costs is a Gamechanger
By Paul Morrone CFP®, CPA/PFS, MSA
Our current economic environment is such that the onus of fiscal responsibility is falling more and more on the American individual. While previous generations relied on comprehensive healthcare coverage, low deductible insurance policies, defined benefit pension plans and robust social service programs, the working individual of today has a more limited set of resources available. This Darwinist approach to self-directed finance may leave many unprepared if the unexpected occurs, resulting in financial hardship and even bankruptcy if they have not taken a prudent and disciplined approach to spending and, more importantly, saving. Further reinforcing this assumption is an alarming statistic published in a 2018 Bankrate survey that revealed a staggering 61% of Americans say that would not be able to pay for a $1,000 unplanned expense.
As high-deductible health insurance plans continue to proliferate the market, the costly burden that was once covered by employers and insurance companies is now being shouldered by employees. The financial impact of a freak accident or short-term illness for an individual covered under many large insurance plans can quickly add up to thousands of dollars. This is a far cry from the plans of yesteryear that had $1,000 maximum deductibles and where virtually all medical services and prescriptions were covered. Companies have taken small steps to mitigate the rapid increase in healthcare spending by their employees by encouraging the use of (and sometimes even funding) Health Savings Accounts (HSAs) to help offset the cost of higher deductibles and ultimately out-of-pocket costs.
The sad truth is that being prepared for a medical issue has changed the game for savers, as it is now even more critical to maintain a healthy emergency fund to prepare for the unexpected. In terms of financial priority, establishing an emergency fund should be at the top of the list. This should take precedent over just about everything other than meeting your ongoing spending obligations to avoid default on a loan or lease. While there is no golden rule as to the ‘minimum’ amount of savings required, most financial planners will tell you that a savings of 3-6 months’ of living expenses is a good benchmark to aim for. For most, this means holding at least $10,000 in savings, and for many it may be substantially more. Depending upon the quality of your health insurance plan, it may be wise to consider keeping at least 6 months’ living expenses in savings for that rainy day, and maybe even more to be on the safe side. Medical costs now need to be factored into a savings plan in addition to the ongoing concern that the water heater may break, you may get a flat tire or lose your job. This, of course, only compounds the myriad of other curveballs that life throws at us, but is a planning consideration worth discussing. Remember, we are only talking about the short-term ramifications of healthcare costs as it pertains to annual out-of-pocket costs. The longer-term impact of higher medical costs, especially when extrapolated throughout a working career or retirement, is even more staggering.
Savings goals are best achieved when the human element is removed. To automate a savings plan, you can set up recurring deposits to a savings account so that the process happens seamlessly in the background. More disciplined savers may be able to simply create an emergency fund in a savings account at the bank where they do their primary banking. Others may feel that it is more difficult to see the accumulated funds in the bank whenever they log in, which may encourage frivolous spending. To combat this, it may be wise to set up a savings account at a different bank so that you don’t see your savings balance as it accumulates.