When you are buying a car, there is a sticker price on the windshield, and there is the “real” price, the one that includes the other costs that come with the transaction. That’s why a $15,000 sticker price ends up at $16,500 once you add sales tax, title, license and transfer fees.

There are parallels in retirement planning. In the conventional narrative, the “sticker price” for retirement is the amount needed to produce a replacement income, and success is declared when you reach “your number.” But the “real price” for retirement includes more than the amount required to generate income. To enter retirement with confidence, you should accumulate additional savings for the “other costs” of retirement.

For the last 17 years, Fidelity Investments has provided estimates of how much a 65-year-old couple retiring this year will need to cover healthcare and medical expenses throughout their retirement. For 2018, this “extra” retirement cost is $280,000. Individually, this breaks down to $133,000 for a male, $147,000 for a female.

But is it really an additional $280,000?

Suppose the 65-year-old couple determines that a comfortable retirement starts at $75,000 of annual income drawn from savings, with yearly adjustments for inflation. Using a safe withdrawal rate of 4 percent, this calls for a baseline accumulation of $1.875 million. But that’s just the amount needed for income. There’s still the matter of addressing the possibility/probability of irregular medical expenses.

If Fidelity’s numbers are correct, a prudent plan would add $280,000 to the accumulation goal, upping the target number to $2.155 million. However, many of these medical expenses, such as annual check-ups and prescriptions, can be included in a monthly budget. But other incidents, especially those associated with a long-term-care situation or a final illness, could incur costs far beyond the capabilities of your monthly income. These large expenditures could eat up principal and jeopardize future income. So while you may not have to accumulate an extra $280,000, you do need some additional savings that aren’t earmarked for producing retirement income.

Using Insurance

Besides additional saving, another strategy to address irregular but probable medical expenses is insurance. Supplemental medical insurance and long-term-care insurance can ameliorate some of the financial trauma from large medical expenses. But while these policies may protect against specific situations, there are potential opportunity costs. Some medical events may not happen (you may not require long-term care), and some expenses may not be covered (like experimental drug treatments). In those circumstances, insurance is not a mistake, but the protection can be seen as pricy. And households that need to add $280,000 to their retirement savings may see the risk of not using the insurance as a reason to forgo it.

What About Whole Life Insurance?

Besides whole life’s value for providing a guaranteed death benefit¹, it can also be used as a vehicle in which to accumulate cash values² for medical expenses in retirement. A combination of protection and cash accumulation, whole life can be applied to a range of medical situations.

From an accumulation perspective, whole life insurance cash values grow tax-deferred. Cash values accumulate through a guaranteed schedule and dividends—there is no investment volatility. And they are liquid³; if and/or when they are needed, the funds will be available.

Besides cash values, many whole life policies feature accelerated benefit riders, which allow a percentage of the death benefit (often up to 80 percent) to be advanced prior to death if the insured is diagnosed with a qualifying chronic or terminal illness. This option means your calculation of cash values for medical expenses is not just dollars (in cash values or somewhere else), but can also include a portion of a life insurance benefit.

The real price of retirement requires accumulating more than just your sticker price for income. In considering the potential extra costs of medical expenses, a whole life policy in retirement can be an effective financial buffer, to be applied as needed, if needed. And if not used for medical situations, both cash values and the death benefit can be used in other ways, either to enhance retirement or increase asset distributions to beneficiaries.

1. All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims-paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

2. Dividends are not guaranteed. They are declared annually by the insurance company’s board of directors.

3. Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59½ any taxable withdrawal may also be subject to a 10 percent federal tax penalty.

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This article was prepared by an independent third party. Material discussed is meant for general informational purposes only and is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 355 Lexington Avenue, 9 Fl., New York, NY 10017, 212-541-8800. Securities products/services and advisory services offered through PAS, a registered broker/dealer and investment adviser. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Wealth Advisory Group LLC is not an affiliate or subsidiary of PAS or Guardian.

PAS is a member FINRA, SIPC.

Neither Guardian, PAS, Wealth Advisory Group, their affiliates/subsidiaries, nor their representatives render tax or legal advice. Please consult your own independent CPA/accountant/tax adviser and/or your attorney for advice concerning your particular circumstances.

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Submitted by Elozor Preil