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Retirement

Are You Prepared for Health Care Costs in Retirement?

January 5th, 2022 | 5 min. read

By Jacob Schroeder

health care costs in retirement

No matter how many apples you eat or what age you retire, chances are you won’t keep the doctor away. That means medical care should be an important part of your retirement plan. The challenge is that health care costs in retirement vary from person to person, depending on personal factors such as your age, health history, income and Medicare eligibility.

 

KEY TAKEAWAYS

  • One study estimates the average 65-year-old couple may need $300,000 saved for health care costs in retirement
  • Early and pre-Medicare retirees may find medical coverage through COBRA, the public marketplace or a spouse's health plan
  • Medicare is not entirely free and does not cover everything

This can lead some people to feel uncertain about the future. In an Employee Benefit Research Institute (EBRI) survey, almost a third of workers are not too or not at all confident they will have enough money for medical expenses in retirement. Retirees, on the other hand, expressed higher levels of confidence, with 77% saying they are very or somewhat confident about having enough money to cover health care costs.

Despite the confidence, many older retirees can expect health care to take a healthy bite out of their retirement savings. According to the latest Fidelity Retiree Health Care Cost Estimate, an average 65-year-old couple retiring today may need approximately $300,000 saved to cover medical expenses.

While such a large estimate may seem alarming, keep in mind costs vary widely from person to person and there are ways to successfully prepare for health care costs in retirement.

TAKE ADVANTAGE OF AN HSA

If you’re still working and have access to a health savings account (HSA), consider taking full advantage of it. An HSA is a tax-efficient tool designed to help you save for health care costs in retirement. Contributions are made with pretax dollars, which some employers match. Those funds can then grow and be withdrawn tax-free when used for qualified medical expenses.

Unlike a flexible spending account (FSA), you won’t lose it if you don’t use it. What’s more, HSAs are fully portable. As the account owner, you get to take it with you upon leaving the workforce.

EARLY AND PRE-MEDICARE RETIREES: FIND COVERAGE

If you retire before age 65, you will need to find health coverage until you become eligible for Medicare.

Some employers offer health insurance to retired employees. Be sure to find out if this option is available to you. Most people, however, don’t have access to employer-sponsored retiree health coverage.

Even if you are healthy, it is not worth the risk to go uncovered. And, although you are retired, there are potential coverage options available to you.

Potential pre-Medicare medical coverage options:

  • Cobra: Under a federal law known as Cobra, companies with 20 or more employees generally must allow departing workers to stay enrolled in the health plan, typically for up to 18 months. But while many firms subsidize workers’ premiums, they can require former employees to pay up to the entire premium, plus 2%.
  • If you are married, consider joining the health plan provided by your spouse’s employer, if allowed.
  • Shop for coverage on the Affordable Care Act Exchange. Based on your income, you may qualify for federal assistance.

REVIEW YOUR MEDICARE OPTIONS

As you near age 65, start evaluating your Medicare options. You can first enroll in Medicare Part A and Part B during a seven-month period starting three months before the month you turn 65.

Monthly premiums for Part A, which covers basic hospital services, are free for most people. (If either you or your spouse paid Medicare payroll taxes for at least 10 years you are fully insured.) Meanwhile, Part B is optional coverage for various medical expenses, such as doctor visits and outpatient services, and requires an annual premium.

The prescription drug coverage portion of Medicare (Part D) and any supplemental coverage, such as Medigap and Medicare Advantage (Part C), is provided by private insurers, so their costs vary based on the plan and where you live.

Keep in mind: Medicare does not cover everything. For example, it does not cover long-term care and dental and vision coverage. According to the EBRI, Medicare covers around 62% of a person’s health care costs.

There are pros and cons to each supplemental option, and most individuals have a dozen or more choices from which to choose. The Medicare Advantage plan, commonly called Part C, is an all-in-one plan that takes the place of Parts A and B and fills in the gaps. It usually includes medications.

Medigap works to cover costs, such as deductibles and co-pays, that Parts A and B do not. When you select a Medigap plan, however, you’re not getting drug coverage, so you’ll likely want to shop for a Part D drug plan and buy it at the same time.

So, which is better? With the Advantage plan, you get the convenience of an all-in-one plan. You also get lower premiums, but higher out-of-pocket costs. Therefore, these plans are generally better for healthier people or those that don’t rely on their coverage that much.

With Medigap, on the other hand, you have lower out-of-pocket costs and fewer surprises. Although, you pay higher premiums, making it a better option for those who need more complete cost coverage for their expenses.

WOMEN: EXPECT HIGHER HEALTH CARE COSTS THAN MEN

Living longer is great but can have its drawbacks. Because women live longer, they typically spend more on medical expenses than men. In the Fidelity study references above, a single 65-year-old woman may spend $157,000 in total health care costs over the course of her retirement compared to $143,000 for a single man the same age.

CONSIDER YOUR LONG-TERM CARE OPTIONS

An estimated 70% of people reaching age 65 today will need some form of long-term care in their lifetime, according to the U.S. Department of Health and Human Services. But even if you may never need long-term care, you’ll be better off if you prepare for it.

Long-term care can be expensive – and Medicare doesn’t cover it. Consider that the national median annual cost of a semi-private room in a nursing home is more than $93,000 according to the Genworth Cost of Care Survey.

Generally, people pay for long-term care in one of three ways: self-funding, long-term care insurance or Medicaid. Which option is right for you depends on many factors, including your age, assets and income, health history and location.

Each option has its own challenges to navigate. For example, to qualify for Medicaid, an individual is only allowed to have $2,000 in countable assets. So, it is a decision to make carefully.

LEARN MORE ABOUT WAYS TO FUND LONG-TERM CARE NEEDS BY DOWNLOADING OUR GUIDE: Options for Funding Long-Term Care Expenses.

PREVENTION MAY BE THE BEST HEALTH CARE COST SAVER

Perhaps, the best way to ensure that your health care costs in retirement are manageable and fit in your retirement plan is to take preventive measures. Join a gym. Eat a healthy diet. Stop smoking. Laugh a lot. Play games.

Although the financial benefits of these activities are not always immediately apparent, they can have a very significant long-term impact. For example, a Rutgers University report on the financial impact of improved health behaviors found “inactivity has been estimated to cost between $670 to $1,125 per person per year.” Further, healthy people tend to pay lower premiums and medical expenses and have higher levels of wealth.

Therefore, when you play a game a tennis and then grab a smoothie with friends, you’re not just enjoying life, you’re likely saving money, too.

THE BOTTOM LINE

In summary, make health a priority long before you stop working. Consider what your health care needs are and how they may change in retirement. In addition to your financial goals and obligations, make sure that potential health care needs are included in your retirement plan. That way, it’ll be a good prediction that you’ll live a happy and healthy retirement.

What else should you be prepared for in retirement? Download this free ebook to learn what steps can help you transition into retirement with greater confidence: Your Money in Your 50s: A Retirement Planning Guide for Procrastinators and Avid Savers

Your Money in Your 50s cover -tiltDownload the E-Book Now!