Planning for Rising Healthcare Costs in Retirement
Whether you’re planning for a traditional retirement or simply want more freedom to choose when and how you work, we all must plan for rising healthcare costs as we age. According to Fidelity’s 2020 Health Care Cost Estimate, a 65-year-old couple can expect to pay about $295,000 on healthcare alone in retirement. Depending on your health and how long you live, your actual costs may be even higher.
While it may seem daunting, planning for healthcare costs in retirement doesn't have to be if you plan ahead. Even as your circumstances and governmental policies change, there are steps you can take now so that your golden years aren’t upended by unexpected medical expenses.
Three Ways to Prepare for Healthcare Costs in Retirement:
#1: Understand What Medicare Covers (and What It Doesn’t)
In general, most people enroll in Medicare Part A (Hospital Insurance) when they turn 65. Depending on how long you work, you may decide to delay Medicare Part B (Medical Insurance) enrollment. Regardless, once you and your spouse stop working, Medicare will likely be your primary insurance provider.
Many people don’t realize that Medicare doesn’t cover everything. Parts A & B cover most inpatient hospital care and medically necessary and preventative services. However, even if your service is covered, you’ll typically need to pay a deductible, coinsurance, or copayment.
In addition, Medicare doesn’t cover long-term care, most dental care and dentures, or eye exams related to prescribing glasses. It also doesn’t cover cosmetic surgery, acupuncture, or hearing aids. You may not need all of these services as you age, but you’ll likely need some. Meaning, you’ll need to look beyond Medicare to help reduce healthcare costs in retirement.
#2: Take Advantage of a Health Savings Account
A health savings account (HSA) is one way to set aside additional savings for healthcare expenses—if you qualify. To be eligible for an HSA, you must be covered under a qualified high-deductible health plan (HDHP). You also can’t be currently enrolled in Medicare.
If your employer offers a qualified HDHP, you may want to consider enrolling to take advantage of a health savings account. An HSA allows you to save pre-tax dollars and invest them within the account on a tax-deferred basis. You can withdraw your HSA funds tax-free, as long as you use them on qualified medical expenses. In addition, you can roll any unused funds over year-to-year and take them with you, even if you leave your current employer.
Since an HSA offers similar benefits to an individual retirement account, it can be an efficient way to boost your retirement savings. However, keep in mind some of the tax benefits go away if withdraw funds for non-medical expenses.
#3: Consider Long-Term Care Insurance
Another way to defray potentially exorbitant healthcare costs in retirement is by purchasing long-term care insurance. According to the U.S. Department of Health and Human Services, someone who turned 65 years old in 2020 has a nearly 70% chance of needing some type of long-term care in their remaining years. In addition, PWC estimates that the average lifetime cost of formal long-term care is $172,000.
To avoid potentially draining your retirement savings, you can purchase long-term care insurance to offset these costs. Long-term care insurance covers expenses related to everyday personal care assistance. For example, help with activities of daily living such as bathing, dressing, or eating. It also covers assisted living and nursing home care.
If you anticipate needing long-term care in retirement or don’t have a spouse or family members to take care of you if something happens, long-term care insurance may be a good option. However, it can be expensive, and not everyone qualifies. Therefore, it’s important to consult an insurance specialist to determine if it’s the right solution for you.
Bottom Line: Start Planning Now for Healthcare Costs in Retirement
The most effective way to plan for healthcare costs in retirement is to grow your financial resources. If you’re not sure how much money you’ll need, start by creating a retirement budget that includes realistic estimates of your medical expenses. Then, see how your projected expenses compare to your current savings.
Depending on the progress you’ve made so far, you may need to increase your savings rate to cover the difference. In addition, work with your financial advisor to determine if a health savings account or long-term care insurance makes sense for your retirement plan.
Although many expenses in retirement are uncertain, the earlier you start planning, the more likely you are to achieve your goals. If we can help you prepare for a financially secure retirement, please contact us.
