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Retirement

Planning for Health Care in Retirement

September 14th, 2022 | 5 min. read

By Jacob Schroeder

health care in retirement

Planning the next chapter of your life is an exciting experience. But there’s a good chance you’re worried about at least one thing: health care. Consider that a PricewaterhouseCoopers financial wellness survey consistently found health care costs as one of the biggest concerns about retirement among all age groups.

Fears about health care costs don’t have to rain on your retirement parade. Medical expenses can generally be included in your retirement budget, alongside things like groceries, transportation and housing. In other words, you can plan for health care in retirement.

How much is health care in retirement going to cost?

Ultimately, the cost of health care in retirement depends on personal factors, such as your current health status, family history, coverage options, location and income.

Still, it’s important to realize many retirees can be blindsided by the accumulating health care costs they incur throughout retirement. According to the Fidelity Retiree Health Care Cost Estimate, an average 65-year-old retired couple in 2022 may need approximately $315,000 saved to cover health care expenses in retirement.

It’s no surprise then that health care costs are among retirees’ biggest financial worries. That’s why you should consider your health care options before you retire. A retirement plan can help you determine how to adequately pay for the care you need.

Another reason to have a plan in place is the fact your health care spending will change throughout retirement. For one, the cost of health care has risen faster than the overall inflation rate. Also, most people tend to spend more money on health care as they age. On the positive side, the increase in health care costs may be canceled out by a decrease in spending on other expenses like entertainment and travel.

What factors impact the cost of health care in retirement?

What you will pay for health care in retirement depends on a variety of personal factors. Fortunately, you may have some control over them, which helps you plan.

So, let’s run through the primary factors that will affect your health care costs in retirement.

Your health

We know. Surprise, surprise. But the fact remains: the worse your health, including your family’s health history, the more you should plan to spend in retirement. Your health status impacts not only the amount and type of care you’ll need, but also the cost of any premiums you pay.

People who smoke or suffer from chronic health conditions can expect to use more of their retirement income for health care needs. Meanwhile, those who regularly exercise, eat a healthy diet, don’t smoke and have no history of chronic conditions, can expect to spend less than even the average person on health care in retirement.

Your Medicare plan

At age 65, you are eligible for Medicare, the national health insurance program for retirees and people with disabilities. Generally, you will need to enroll in Medicare Parts A and B. However, Medicare does not cover everything. For example, it does not pay for dental and vision coverage or long-term care.

It’s likely you will want a supplemental insurance policy, such as Part D (prescription drugs), Medigap and Medicare Advantage (Part C). There are many plans with different levels of coverage to consider. It’s best to shop around by first selecting a plan that offers the type of care you need, and then pick the insurer and premium that works for you.

Your retirement age

As mentioned above, you become eligible for Medicare at age 65. But if you retire before age 65, you will have to find alternative coverage until then (more on that below). Some options include joining your spouse’s plan, staying on your employer’s plan (if available) or buying coverage through an insurance marketplace.

Your location

It might not seem fair, but you will pay higher or lower health care costs simply because of where you retire. The cost of medical services and procedures can vary from state to state, and even city to city. But so can premiums. While traditional Medicare (Part A and Part B) is the same everywhere, the cost of any supplemental plans or private insurance coverage will vary among expensive and cheaper locations.

Your income

If you plan to take large withdrawals from your retirement accounts or plan to work after enrolling in Medicare, you may pay more in premiums. That’s because individuals with higher incomes may be charged an additional premium for Medicare Part B. Meanwhile, lower income individuals who qualify for assistance may be exempt.

Health care coverage and funding options in retirement

The right health care coverage for you in retirement depends on your personal situation. Similarly, the best way to fund health care in retirement depends on your financial situation.

Medicare

Again, you’re eligible for Medicare at age 65, even if you’re still working or receive health benefits elsewhere. You are generally required to enroll in Medicare on time or you may be subject to late-enrollment penalties and a gap in health insurance coverage. Though in some instances you can enroll later. For more information, see medicare.gov.

Traditional Medicare includes Part A and Part B. For Part A, the monthly premiums are free if either you or your spouse paid Medicare payroll taxes for at least 10 years, which makes you fully insured. There is a monthly fee for Part B, which is deducted from your monthly Social Security check, if you are collecting benefits.

Prescription coverage (Part D), Medicare Advantage (Part C) and Medigap supplemental plan costs all vary.

What if you’re not yet eligible for Medicare?

Your spouse’s plan

If your spouse is still working, you may be able to join their plan. This is probably the most cost-effective way to stay covered in retirement.

COBRA coverage

If you retire within 18 months before becoming eligible for Medicare, you can sign up for COBRA coverage to bridge the gap. It's the same employer-provided coverage you had while working. The difference is that your employer won't subsidize it anymore, so your costs will increase.

Also, some employers offer continuing retirement coverage or pre-Medicare health subsidies. If that’s you, be sure to take advantage of those benefits.

Health care exchange

You can always buy insurance through a health care exchange, which are offered by all states. However, this is likely the most expensive option.

Health savings account

A great savings vehicle for health care in retirement is a health savings account (HSA). An HSA is a savings and investment account available to people in high-deductible health plans (HDHP) to help pay for out-of-pocket medical costs. To qualify for an HSA, you must be part of an HDHP with no other health insurance and have yet to qualify for Medicare.

You can contribute to an HSA until age 65, your funds grow tax-free and you do not owe taxes on money withdrawn from an HSA to pay for qualified medical expenses. These expenses range from hospital bills and insurance deductibles to Medicare premiums and long-term care services. This is an important advantage of an HSA over a traditional 401(k) or IRA as it relates to retirement. You pay income taxes on withdrawals from those accounts no matter how you use that money.

Retirement accounts

To pay for health care in retirement, you will likely use some funds from your retirement accounts (401(k), IRA, etc.). The most tax-efficient way to access and use that money depends on the type and size of your accounts, as well as your other income sources. This is where proper retirement planning comes in – effectively using your retirement income to pay for the care you need without draining your savings.

Putting together your plan

The uncertainty and potential burden of health care is a major reason why it’s important to have a retirement plan. Of people with a written retirement plan, 86% know how they will pay for medical expenses in retirement, according to one Franklin Templeton survey.

A retirement plan isn’t only about dollars and cents. It takes into account your health status and needs, coverage options, retirement location and more. Sure, it doesn’t feel good thinking about the “what ifs” regarding your health in the future. But, building a plan around them will certainly make you feel better today.

Have you taken the steps necessary to be on track for retirement?

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