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If You Have Your Health…

Do me a quick favor and re-read the title of this article. Can you finish the popular saying? I am guessing you probably can, but if not let me give you a hint. It deals with a certain, round dollar amount.

If you have your health, you have….$1 million. Or so I have been told.

It makes sense. Health care is expensive, and it is getting more expensive by the year. Here’s the question I have been asking myself, though: Is the saying true? How much do you have if you have good health versus poor health? Does it really add up to $1 million?

Let’s find out.

This is an important issue for many people, specifically those entering retirement. When developing a financial plan for clients, we go to great lengths to correctly account for the growing cost of health care. For any retiree, health care represents one of the biggest annual expenses in the budget. It must be accurately projected to ensure life savings are not left in the dust before we are returned to it.

In order to determine whether the $1 million figure is rooted in fact or fiction, we must first tackle how much health care costs. For our purposes, let’s pick on two fictional 65-year-olds named Healthy Helen and Sickly Sally, both entering retirement today. How does health impact medical costs for each of them over a 25-year retirement?

A fascinating study was released last year called, “Planning for health care costs in retirement.” Okay, the authors could have spiced up the title a little bit. And to be fair, calling it ‘fascinating’ may be over-selling it. It’s not exactly a page-turner. But if you’re in the business, it contains a few jewels of information, which I will summarize here to save you excessive yawning and drowsiness.

In the study, researchers found that a healthy 65-year-old will have annual health care costs between $3,000 and $4,300 per year. That includes insurance premiums, prescription drugs, out-of-pocket expenses, and dental and vision costs. It excludes long-term care costs, which is appropriate for our exercise. On the other hand, the researchers determined that a 65-year-old in poor health could spend anywhere between $3,500 and $21,000 per year.

For our purposes, let’s go with the 75th percentile cost for each. So, Healthy Helen would spend $3,800 per year in health care costs and Sickly Sally would dole out $13,300, a difference of $9,500 per year. Multiply that by a 25-year retirement, and we arrive at a difference of $237,500. That’s far cry from $1 million dollars.

But wait. We are forgetting something. Health care costs are increasing at a fairly rapid rate.

Let’s assume health care costs increase at 4% a year, which is a reasonable expectation. If that is the case, the difference between Healthy Helen’s and Sickly Sally’s health care costs will still be $9,500 in Year 1, but after inflation, the difference in Year 25 would be $31,655.

If we add up all of those annual differences, properly accounting for inflation, we end up with Sickly Sally spending $481,033 more than Healthy Helen over 25 years. Still, that’s a long way from $1 million.

But wait. We are forgetting something else. Money not spent on health care can be saved and invested.

Even in a relatively conservative portfolio of 50% U.S. stocks and 50% 10-year U.S. Treasury bonds, the average annual return since 1928 has been 7.2%. For the sake of argument, say there is 1.2% per year subtracted for investment costs and taxes, leaving a net return of 6.0% per year.

In that scenario, investment gains alone on Healthy Helen’s annual health care savings would amount to $462,507 over the 25-year period. That’s just the gains. We have to add back in the amounts she saved each year, which we said earlier – again, accounting for inflation – totaled $481,033.

Where does that leave us? Everything included – annual savings and investment gains – sums to $943,540. That’s close enough to $1 million for me.

So it’s true. If you have your health, you really do have about $1 million.

Think about what that means. A routine walk may be just as valuable as trying to earn a few extra percentage points every year on your investment returns.

We should all spend as much time taking care of our health as we do focusing on our wealth. It’s not just a pithy saying. The dollars are real. And they add up to one million.

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