Planning for Healthcare Expenses in Retirement: What You Need to Know
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Planning for Healthcare Expenses in Retirement
Retirement is a time of relaxation and enjoyment, but it can also come with significant financial challenges, especially when it comes to healthcare expenses. According to the annual Fidelity Retiree Healthcare Cost Estimate, a typical retired couple aged 65 in 2023 can expect subsequent medical expenses of $315,000. This staggering sum does not even include the additional costs of long-term care, over-the-counter medications, or most dental services.
The Rising Cost of Healthcare in Retirement
As healthcare costs continue to rise, it is crucial to understand and plan for these expenses. Many people are not mentally or financially prepared for the high cost of healthcare in retirement. Whether you are early on in your career, close to retirement, or already making the transition out of the workforce, it is important to take proactive steps to prepare for growing medical costs.
Key Takeaways:
- A typical 65-year-old retired couple in 2023 faces an estimated $315,000 in subsequent healthcare costs.
- Individuals should account for additional costs related to over-the-counter medications, long-term care, and dental care.
- Medicare may pay for some health care in retirement but does not fully cover all of it.
- Health Savings Account (HSA) funds and long-term care insurance can help consumers prepare for these costs.
Fitting Health Care Into a Retirement Budget
When it comes to planning for healthcare expenses in retirement, it is crucial to consider your overall retirement budget. Your budget depends on two factors: how much money will come in each month and the total of your expenses.
According to the Social Security Administration (SSA), Social Security benefits are only meant to supplement retirement savings and replace about 40% of pre-retirement income for medium earners. In 2022, those 65 and older spent an average of $4,818 per month. However, Social Security is only expected to pay a maximum monthly benefit of $3,822 in 2024 to individuals who retire at the full retirement age. This means that you will likely have to look beyond Social Security to cover medical expenses.
How Much Retirement Income to Budget for Health Care
The amount of retirement income you should budget for health care expenses depends on your age and overall health. Chris Schaefer, head of the retirement plan practice at MV Financial, explains that “the healthier we are going into retirement typically means that less money will be allocated toward health care expenses”. However, it is essential to plan for a longer time in retirement as a healthier lifestyle often leads to a longer life expectancy.
Social Security benefits are subject to annual cost-of-living adjustments (COLAs) to keep up with inflation. The COLA for 2023 was 8.7% and for 2024, it is 3.2%. This means that you should anticipate the rising cost of healthcare and consider budgeting accordingly.
What Medicare Covers (and Doesn’t Cover)
Medicare is a federal health insurance program primarily for individuals aged 65 and older. While it does cover some health care costs in retirement, there are limitations to its coverage. Michael Gerstman, founder and financial advisor of Gerstman Financial Group, explains that “without a Part D prescription drug policy, Medicare does not cover medications”.
Original Medicare (Parts A and B)
Original Medicare plans, also referred to as Parts A and B, do not cover dental and vision care. However, Medicare Advantage plans, also known as Part C plans, typically offer coverage for dental and vision care. If you plan to rely on Medicare to help cover medical expenses in retirement, it is essential to budget for deductibles, premiums, and other out-of-pocket costs.
- The inpatient hospital deductible for Medicare Part A (which covers hospital stays and procedures) is $1,632 in 2024.
- The standard monthly premium for Part B (which covers doctor visits and outpatient treatments) is $174.70 in 2024.
- The Part B annual deductible for 2024 is $240.
Medicare Advantage (Part C)
Medicare Advantage plans are offered by private insurers approved by Medicare. These plans generally cover the same costs as Medicare and provide the Part D prescription drug benefit. Depending on the insurer and the policy, you may pay less for a Medicare Advantage plan than for Original Medicare. Some plans may also extend coverage to include costs associated with vision, dental, and hearing.
- Medicare Advantage plans generally cover the same costs as Medicare, including hospital stays, doctor visits, and outpatient treatments.
- Some Medicare Advantage plans also include coverage for prescription drugs, vision, dental, and hearing.
Standalone Dental Insurance
If you do not have coverage for dental expenses through Medicare Advantage, you may consider a standalone dental insurance plan. Many plans focus on the types of coverage seniors may need, including crowns, root canals, dentures, and tooth replacements.
Look Beyond Retirement Savings to Pay for Healthcare
As healthcare costs continue to climb, it is essential to explore alternative ways to pay for medical expenses in retirement. Here are two potentially effective strategies:
Health Savings Account (HSA)
If you are not yet enrolled in Medicare, you can save money for retirement healthcare costs with a Health Savings Account (HSA). HSAs are available with high-deductible health plans (HDHPs) and offer triple tax advantages:
- Deductible contributions: The money you contribute to an HSA is tax-deductible, which reduces your taxable income.
- Tax-deferred growth: Any investment gains within the HSA are tax-deferred, allowing your savings to grow faster.
- Tax-free withdrawals for qualified medical expenses: When you use the funds in your HSA for eligible medical expenses, the withdrawals are tax-free.
HSA funds can be used to pay for certain medical premiums, including Medicare premiums and long-term care insurance premiums. If you are in your 50s or older, you can take advantage of catch-up contributions and employer contributions to maximize your HSA savings. Individuals aged 55 or older can make a catch-up contribution of $1,000 per year in addition to the maximum contribution limit.
For 2024, the regular HSA deduction limit is $4,150 for individual coverage and $8,300 for family coverage. However, keep in mind that those enrolled in Medicare can no longer make new contributions to an HSA.
Long-Term Care Insurance
Purchasing long-term care insurance is another way to fill the gap left by Medicare. This type of policy can pay a monthly benefit toward long-term care for a specified amount of time or for the remainder of your lifetime. While long-term care insurance premiums may not be affordable for everyone, there is an alternative.
Michael Gerstman suggests buying a life insurance policy that has the option of adding a long-term care insurance rider. This allows younger people to get ahead in their long-term care planning, as the premiums are typically lower when you purchase life or long-term care insurance at a younger age.
What is the Average Medical Expense for Retirees?
In 2023, the average medical expense for a retired couple during retirement was $315,000. This figure does not include other essential items such as housing and food, highlighting the significant financial burden healthcare costs can impose during retirement.
How Do You Pay for Medical Expenses in Retirement?
Paying for medical expenses in retirement requires careful planning and consideration of various options. Here are a few ways to cover healthcare costs:
- Government Programs: Medicare is the primary government program that provides health insurance coverage for individuals aged 65 and older. Contributions you make to a Health Savings Account (HSA) before turning 65 can also help cover healthcare costs.
- Savings Accounts: Roth or traditional IRAs can be used to save for retirement and cover medical expenses.
- Long-Term Care and Disability Insurance: Long-term care insurance can help cover the cost of long-term care, while disability insurance provides income replacement if you become disabled and unable to work.
It is essential to evaluate your options and choose the most suitable ones based on your individual circumstances and financial goals.
The Bottom Line
Healthcare spending can easily account for a significant portion of a retirement budget. Estimating these costs and creating a strategy for spending can help preserve more of your retirement assets for other expenses. By understanding the rising cost of healthcare, considering Medicare coverage, and exploring alternative funding options like HSAs and long-term care insurance, you can better prepare for the financial challenges of healthcare in retirement.
Remember to regularly review your retirement plan, adjust your budget as needed, and consult with financial professionals to ensure you have a solid financial foundation for your retirement years.
