Healthcare expenses are a critical part of retirement planning, especially for Florida Retirement System (FRS) participants preparing to exit the Deferred Retirement Option Program (DROP). While your DROP payout provides a valuable financial resource, understanding how to align those funds with potential long-term care and healthcare expenses is essential to protecting both your retirement savings and your quality of life.
DROP and long-term care planning go hand in hand — by preparing now, you can help ensure you have the financial flexibility to cover future medical needs without jeopardizing your overall retirement goals.
Healthcare Costs in Retirement: What to Expect
As you age, healthcare becomes one of the most significant expenses in retirement. Costs typically rise as retirees face:
- Increased doctor visits and specialist care.
- Higher prescription drug costs.
- Medicare premiums and supplemental insurance.
- Long-term care services such as in-home care, assisted living, or nursing home care.
Even if you’re healthy today, planning for future care needs helps protect your retirement income and provides flexibility if unexpected health issues arise.
How DROP Benefits Can Support Long-Term Care Planning
Your DROP payout provides a potential option to consider for future healthcare and long-term care expenses. Depending on your personal situation, you can choose from several strategies:
- Set Aside a Dedicated Healthcare Fund
Consider reserving a portion of your DROP payout to cover future medical expenses. Keeping these funds in a liquid, easily accessible account allows you to respond quickly to healthcare needs.
- Purchase Long-Term Care Insurance
Some retirees use a portion of their DROP funds to purchase long-term care insurance, which can help cover the high costs of extended care services. Premiums for these policies are typically lower if purchased at younger ages, so timing matters.
- Hybrid Long-Term Care Policies
Hybrid policies combine life insurance with long-term care coverage, providing flexibility if care is needed while preserving some benefit for heirs if it’s not.
- Health Savings Accounts (HSAs)
If you have an HSA from a previous high-deductible health plan, you can use those funds — tax-free — for qualified healthcare expenses in retirement. While DROP funds themselves cannot be added to an HSA, your DROP payout can help cover living expenses, allowing you to preserve your HSA for healthcare costs.
Medicare and DROP: Planning for the Transition
For many retirees, Medicare becomes the primary source of health coverage after age 65. If you exit DROP before reaching Medicare eligibility, you’ll need to plan for an interim health insurance solution, such as:
- Employer Retiree Health Plans (if available).
- COBRA Coverage for up to 18 months.
- Marketplace Insurance Plans (especially if you retire before age 65).
Consider How Medicare Works with Long-Term Care
- Medicare covers short-term rehabilitation services (up to 100 days after hospitalization) but does not cover most long-term care services, such as custodial care in nursing homes.
- This is why long-term care planning is so essential — relying solely on Medicare may leave significant gaps in coverage.
Planning for Long-Term Care Costs
The cost of long-term care can vary widely depending on location, type of care, and duration. According to recent estimates, the average annual costs for common care options include:
- In-home care: $60,000+ per year
- Assisted living: $55,000+ per year
- Nursing home (private room): $100,000+ per year
Planning can help manage costs that may impact your DROP savings and other retirement income.
Strategies to Plan for Long-Term Care Expenses Using DROP Funds
- Self-Funding with DROP Savings
Some retirees choose to self-fund long-term care by setting aside a portion of their DROP payout. This approach provides flexibility but requires careful budgeting to ensure funds last.
- Long-Term Care Insurance Premiums
Using a portion of your DROP payout to cover premiums for a long-term care insurance policy can provide protection while preserving your remaining retirement savings for other goals.
- Combination Strategies
You might combine approaches, using part of your DROP funds for long-term care premiums and reserving another portion for out-of-pocket healthcare costs.
Long-Term Care and Your Spouse
For married retirees, planning for long-term care is a joint effort. If one spouse requires extended care, it can significantly impact the financial security of the other.
- Survivor income: Make sure your spouse will still have sufficient income if a large portion of assets is spent on care.
- Estate planning: Work with your attorney to ensure both spouses’ wishes are reflected in your estate documents.
Incorporate Healthcare and Long-Term Care into Your Broader Retirement Plan
Healthcare planning shouldn’t happen in isolation. Your healthcare and long-term care strategies should work in tandem with your overall retirement income plan, including:
- FRS pension payments.
- Social Security benefits.
- Withdrawals from personal retirement savings.
- Income from investments or other sources.
DROP benefits provide a valuable resource that can enhance this planning, but it’s important to think holistically about how all income sources will work together to cover living expenses, discretionary spending, and future care needs.
How BENCOR Helps with DROP and Long-Term Care Planning
BENCOR has decades of experience helping Florida public employees navigate DROP participation and prepare for retirement. Our team can work with you to:
- Review how much of your DROP payout to allocate for healthcare and long-term care needs.
- Explore strategies for balancing self-funding with insurance solutions.
- Coordinate your healthcare planning with your broader retirement income and estate plans.
By planning ahead, you can help protect both your retirement savings and your future care options.
Final Thoughts on DROP and Long-Term Care Planning
Your DROP payout has the potential to support your lifestyle and may contribute to your future healthcare and long-term care needs. By planning ahead, you can align your savings with your healthcare goals, ensuring both you and your spouse have access to quality care without jeopardizing your long-term financial stability.
If you’re ready to explore how DROP and long-term care planning fit into your overall retirement strategy, we can help. For personalized advice and in-depth planning, please schedule a free consultation with our team at BENCOR DROP support. We look forward to hearing from you!