Planning for Rising Healthcare Costs in Retirement

No matter your retirement goals, planning for rising healthcare costs as you age is essential.

Since 2014, medical costs in the U.S. have risen 5-7% annually, on average. As costs continue to increase, it’s no wonder healthcare is consistently one of the top expenses for retirees.

In fact, a 65-year-old couple can expect to pay about $315,000 on healthcare alone in retirement, according to Fidelity Investments. Depending on your health, how long you live, and factors such as inflation, your actual costs may be even higher.

Planning for rising healthcare costs in retirement may seem daunting. But it doesn’t have to be. Taking the right steps now can help ensure you’re well prepared for what lies ahead, even as your circumstances and external factors change.

Consider taking these three steps to prepare for rising healthcare costs in retirement:

 #1: Understand What Medicare Covers (and What It Doesn’t)

Most people enroll in Medicare Part A (Hospital Insurance) when they turn 65. However, you may decide to delay Medicare Part B (Medical Insurance) enrollment depending on how long you work. Either way, Medicare will likely be your primary insurance provider in retirement.

Unfortunately, many people don’t realize that Medicare doesn’t cover everything. Indeed, Parts A & B cover most inpatient hospital care and medically necessary and preventative services. But 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. Nevertheless, it’s important to understand what Medicare does and doesn’t cover. That way you can defray healthcare costs in retirement with supplemental savings and insurance.

#2: Take Advantage of a Health Savings Account to Prepare for Rising Healthcare Costs in Retirement

A health savings account (HSA) can be a tax-efficient way to prepare for rising healthcare costs in retirement. To be eligible for an HSA, you must be covered under a qualified high-deductible health plan (HDHP). You also can’t currently be enrolled in Medicare.

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 unused funds over each year and take them with you, even if you leave your current employer.

An HSA offers similar benefits to an individual retirement account, making it 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

Lastly, long-term care insurance may help defray rising healthcare costs in retirement. However, it’s not right for everyone.

According to the Administration for Community Living, someone turning age 65 today has almost a 70% chance of needing some type of long-term care services in their remaining years. Meanwhile, the national annual median cost of care for a private room in a nursing home is over $100,000, according to New York Life.

To avoid the possibility of draining your retirement savings, you can purchase long-term care insurance to help 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.

Long-term care can be a good option if you don’t have a spouse or children to care for you in retirement or don’t want to be a burden to family members. However, it can be expensive, and not everyone qualifies. Be sure to consult a financial planner and/or insurance specialist to make sure it’s the best option for you.

It’s Never Too Early or Late to Start Planning for Healthcare Costs in Retirement

Ultimately, the most effective way to plan for rising 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 healthcare 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, consider working with a trusted financial advisor like Milestone Asset Management Group to determine if a health savings account or long-term care insurance makes sense for your retirement plan.

Many expenses in retirement are uncertain. However, the earlier you start planning, the more likely you’ll be to reach your goals. To speak with a member of our team about preparing for a financially secure retirement, please contact us. We’d be happy to help.