Rising Health Care Costs – Their Effect on Your Retirement

Medical bankruptcies have increased 20 fold in the last 20 years. How will increasing Health Care costs effect your retirement?

Lately I have read a few articles that confirm a belief that I have held for a while. At any age, unexpected health care costs can derail a person’s finances. As we get older, however, health care and our finances are increasingly delicate issues. “Health or Disability” was cited as a reason for looking into a reverse mortgage by 28% of seniors surveyed, according to an AARP study by Donald L. Redfoot, Ken Scholen, and S. Kathi Brow.

A recent article on MSNBC.com, “Confidence in retirement savings is crumbling” reported that about 22% of workers were worried about “not having enough money to cover medical expenses in retirement.” Twenty-seven percent of workers were worried about long-term care costs. The article also reported that 15% of people that were already retired were worried about medical expenses, and 28% were worried about long-term care.


There are many accounts of people who have lost homes, or declared bankruptcy because of health care costs. Even with health insurance, co-pays and care that is not covered by insurance can still cripple many people’s finances. In “Lack of Health Insurance Leads Many To Bankruptcy” by Kristian Foden-Vencil, Oregon Public Broadcasting, Oct. 3, 2007, Doctor David Himmelstein , an associate professor at Harvard, said that of Americans who file for personal bankruptcy, approximately half cite medical bills as the prevalent cause. According to the article, he also stated that “over the last 20 years, there has been a 20-fold increase in the number of medical bankruptcies.”

Another measure shows that senior citizens are especially vulnerable to the costs of medical care. The paper titled, “How Many Struggle to Get By in Retirement?” by Barbara A Butrica, Dan Murphy, and Sheila R. Zedlewski, re-examines the official measure of the poverty threshold. The authors of the report write that the official poverty measure does not accurately reflect today’s spending needs and economic resources, especially for people 65 and older, whose “resources, needs, and health expenses differ most dramatically from the assumptions reflected in the official measure.”

The study includes additional income that the official measure does not include, specifically: “in-kind transfers, capital gains and losses, taxes, out-of-pocket health spending, the value of owner-occupied housing, [and] the potential income from financial assets.” Even with the additional income, however, the results of their study showed that a more comprehensive accounting for health care spending “produce higher poverty rates than the official measure” for people over age 65.

As health care costs continue to rise and our need for health care increases as we age, people are often put in the position of choosing how to allocate their income. I have worked with many homeowners who have had to choose between paying their mortgage and other bills or paying for necessary health care. If they were lucky enough to be ever 62 and have enough equity in their home to qualify for a reverse mortgage, however, those health care costs would no longer have to be paid at the expense of not paying their mortgage, and their social security checks, their pension, and their retirement fund could go that much further.

The report also states that “Proponents of using reverse mortgages for long-term care costs argue that they could enable more seniors with disabilities or long-term care needs to remain at home, with services they control, while potentially saving public dollars being spent through the Medicaid program.” Most importantly, senior homeowners could pay for these services comfortably, without having to decide between the medical care or their mortgage.

Reverse mortgages are a valuable way to prepare for unexpected expenses in retirement. As health care costs continue to go up it is important to prepare yourself ahead of time for any unforeseen problems. Qualifying for a reverse mortgage is not dependent on credit history or income so even if you have had problems paying medical bills or your mortgage in the past, it will not affect your ability to get a Reverse Mortgage now. With reverse mortgages, no mortgage payments need to be made, essentially removing the risk or foreclosure, and they are FHA insured, non-recourse loans, so they are safer than a traditional mortgage as well. Not everyone needs a Reverse Mortgage, but it is important to keep it in mind if you are faced (or ever could be faced) with a medical emergency — it may just keep you in your home, and healthy.

Guest Post written by Brianna Penley for the ReverseMortgageCity.com Media Center.

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  • I think we need to focus on much more important news happening last and this week!!!. For those of you know dont know, just yesterday (4/21) Bank of America announced the suspension of their Independence Plan, right after Financial Freedom suspended their Cash Account Plan on Friday (4/18). The previous week (4/11) Countrywide suspended their Simple Equity Product and previously both Southwest Mortgage and Generation Mortgage had suspended their proprietary product. Although proprietary reverse mortgage products only represent 10% of all RM origination, these moves can have a profound effect on our bottom lines depending on the geographic area you are in (ie North East, Hawaii, and other high end areas in the country etc).
    I find it very strange that there has been no coverage at all of such drastic changes.
    As for the reasons, all lenders claim that the secondary market is no longer buying these products. That is obviously true because with the current real estate market crisis the home appreciation component of the RM risk analysis model has become the dominant factor.Folks in Wall Street and the secondary market look at repayment rate (combination of mortality rate and mobility rate) and future home appreciation as the important parameters for determining pricing and availability of thr product. Loosely speaking, repayment rate is more indicative of the timing when the loan will be repaid while future home appreciation is the primary determinant of how much cash is received upon sale of the home. The heart of the problem has to do with what is called the “Cross-over-Point” or the point in time where the Principal outstanding together with the acrued interest exceeds the home value. Once the cross-over-point is reached then a loss or point of diminished return is realized to the investors.
    Thus, here is an interesting deduction: The pull of proprietary reverse mortage product is created by the falling of future home appreciation (modelling) which is created the falling prices of real estate prices today, which was created by the credit crunch and subprime crises in the forward mortage market. Another deduction is that increasing the margin on these products will not cure the problem, because the cross over point is reached even faster.
    Now an interesting point: In the HUD guaranteed HECM product, the credit risk (what we just talked about) is absorved by HUD after assignment, so here there is no issued at all. Also we see the HECM secondary market demanding higher margins, because it will be HUD (and the tax payer) who mostlikely will deal with the loss.
    What does all this represent? The proprietary RM products offers will continue to be reduced unless home
    appreciation starts happening soon.
    Note: Both Countrywide and Financial Freedom did keep their proprietary products available to their retail outlet.


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