I am concerned about healthcare costs in retirement. What do I need to know?

health care costs in retirement

health care costs in retirement

Healthcare is one of the biggest costs you’ll face in retirement. In fact, by many estimates, it is the single biggest cost for retirees. A representative study by Fidelity found that a 65-year-old couple in 2022 will need more than $315,000 to cover health care costs during retirement. This is after-tax, so if you’re planning on pulling that money out of a 401(k) or other taxable account, it will likely mean about $362,000 in overall savings. With that kind of money at stake, planning for health care expenses in retirement is essential. To help you plan how you’ll pay for health care in retirement, consider working with a financial advisor.

How costs will change

With retirement planning, when it comes to health care costs, time is and is not on your side.

The good news is that healthcare costs tend to escalate later in life. For most retirees that means the bulk of their spending will come later in retirement, which gives you more years to spare. Absent individual circumstances, you can usually plan on an extra decade to grow your medical savings before costs really start to accelerate. That means you don’t necessarily need all that $362,000 by age 65, although you should be on track by then.

The bad news is that healthcare costs are growing rapidly overall, sometimes as much as 5% a year. This is especially bad news if you’re young. For young people in their 20s, 30s, and even 40s who are currently saving for retirement, it’s almost certain that your numbers will be much higher by the time you reach your 60s and 70s. Be prepared for this, because if you plan to fund a 2062 retirement based on the 2022 numbers, you’re in for a nasty surprise.

Basics of health care

For most retirees, their single greatest asset will be the Medicare program. This makes it important to understand how this program works and how it can help you.

Specifically, as you approach and retire, it’s important to understand what Medicare does and does not cover. For example, Medicare Part B covers much of what we consider standard medicine such as doctor’s office visits, medical devices, and similar care. While premiums and associated costs have increased for all Medicare services, Part B has become especially expensive. Since you expect to spend more time at the doctor’s office, you should factor that into your expenses.

Or consider long-term care needs. Medicare rarely covers long-term care like assisted living facilities. If you or your doctor think you may eventually need that kind of service, it’s important to start saving for it now. You’ll need to cover those expenses yourself, so it’s wise to have your savings well underway.

Basics of individual insurance

health care costs in retirement

health care costs in retirement

As a corollary to understanding Medicare, it’s important to know whether you’ll need private insurance to supplement your government plan. Many, if not most, retirees rely on Medicare as their only form of health insurance. However, if your needs significantly exceed those provided by the Medicare program, you may need a private health insurance plan to supplement that coverage. This is something to start studying early, because the sooner you enroll the better.

As you retire, start talking to your doctor about your likely long-term needs. Often your doctor can see early warning signs for conditions that won’t emerge until later in life, allowing you to start planning for those needs today. If you need supplemental insurance, it’s a good idea to start looking for it early.

Benefits of HSAs

An HSA, or “Healthcare Savings Account,” is a form of tax-advantaged savings account that focuses on health care spending.

It works much like a 401(k) combined with a Roth IRA. Your HSA is a portfolio of investments. You can make contributions to this portfolio tax-free up to an annual limit set by the IRS. You can then make withdrawals from this account which is also tax free as long as you spend that money on health and medical expenses.

A health savings account can be a fantastic savings vehicle for health care spending. The problem is that access to them is extremely limited. To qualify for an HSA, you must be enrolled in a qualifying high-deductible health insurance plan. This makes HSA accounts out of reach for current retirees, who are eligible for Medicare. It also creates a staple for most other savers. While an HSA is a great way to save money on medical bills, a high-deductible plan is generally a bad idea for all but the particularly young and healthy.

If you’re 25 and have the option, then sign up for a high-deductible plan and put some money aside for the future. For everyone else, if you have the option to sign up for a better insurance plan, you should. Then save money on healthcare costs in a fully taxed standard wallet.

Create a dedicated account

Whether or not you qualify for an HSA, you can still create a dedicated health portfolio.

The IRS offers several options for retirement investments, from IRAs and 401(k)s to the relatively rare Roth 401(k). Exactly which accounts you qualify for will vary based on your employment status. But whether you open a tax-advantaged retirement account or just a set aside portfolio, you can still build a dedicated pool of healthcare funds.

By separating your income portfolios from your medical portfolios you can avoid overlapping the two funds. You can look at a section of your finances and plan specifically how much everyday life will cost. This is the portfolio you will draw on each month to replace your income once you stop working. Then you can look at another section of your finances and plan specifically for how much health care will cost. By keeping the two separate you can track each specific pool of savings and avoid the risk of overstating your funds.

Plan to adjust your spending

health care costs in retirement

health care costs in retirement

This is, sadly, the other side of planning your retirement health care costs. It’s always a good idea to budget for lifestyle expenses that you can cut back when the need arises. Healthcare is a unique form of spending in that you ultimately have very little flexibility to set your budget. Biology doesn’t negotiate so, at some point, these costs will become necessary. While you may avoid some quality-of-life treatments, you’ll eventually need certain procedures and medications, and that means you’ll have to spend this money.

Ideally, you will have more than enough cash on hand for health care costs. But just in case your savings aren’t up to par or you get hit with an unexpected expense, it’s worth planning how you can cut back elsewhere. Hopefully, this will be some wasted planning. If not, at least you won’t be left scrambling in the face of a steep bill.

The bottom line

Healthcare is the single largest cost for many retirees. It’s a good idea to start planning ahead for that portion of your budget, before you retire. Once you’ve begun your retirement, it’s a good idea to continue tracking that portion of your savings.

Health tips

  • Let’s keep talking about Medicare. This is one of the most popular, but also the most complicated programs offered by the government. But if you want to plan your health care spending in retirement, understanding Medicare from start to finish is essential.

  • A financial advisor can help you plan how you will pay for health care in retirement. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.

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