You may envision retirement planning as focusing solely on enjoyable and fulfilling experiences such as home renovations, travel adventures, lavish gifts for grandkids, and overall enjoyment of life. However, neglecting the serious aspects of retirement, particularly health care, can leave a significant gap in your financial future.
Health care expenses could become your most significant financial burden in retirement, surpassing other costs. Fidelity performs annual calculations to determine the medical costs for a couple retiring at age 65. In 2018, they estimated that a typical couple would require $280,000 in current dollars to manage medical expenses in retirement, excluding costs related to long-term care.
While that number might induce stress, there’s no need for alarm. Average-income individuals can prepare for retirement health care expenses without resorting to desperate measures. Here are essential insights regarding medical care in retirement and tips for effectively budgeting for it. (Also see: 4 Affordable Retirement Locations Offering Excellent Health Care)
Your health in retirement
Let’s begin with some uncomfortable truths: your health may decline as you age during retirement.
Facing the concept of deteriorating health can often be more challenging than contemplating mortality, which is an unavoidable reality. Survey data reveals a stark contrast in planning—42 percent of Americans have set up a will or estate plan, whereas only 30 percent have managed to save over $1,000 for retirement, according to findings from the Economic Policy Institute.
As aging is linked with health issues, statistical data from the CDC indicates that about three-quarters of Americans over 65 suffer from multiple chronic health conditions. These are defined as illnesses that are persistent for over a year and necessitate continued medical care or restrict daily activities.
Furthermore, the Alzheimer’s Association notes that one in three seniors passes away with Alzheimer’s disease or another form of dementia. The financial implications of managing chronic illnesses or dementia can be particularly damaging to retirement savings. (See also: Avoid Letting Health Issues Deplete Your Retirement Savings)
Understanding Medicare
The $280,000 estimate for retirement health care expenses by Fidelity is especially concerning as it pertains to a couple aged 65 who are already eligible for Medicare. Notably, Medicare premiums alone account for 35 percent of that estimate, equating to $98,000. The rest of the costs break down into 45 percent for co-pays, coinsurance, and deductibles and 20 percent for prescription medications.
Many individuals underestimate Medicare’s costs and coverage limitations. Therefore, it’s crucial to comprehend what Medicare includes and excludes. (See also: 5 Common Myths About Medicare Explained)
Medicare Part A
Medicare Part A, known as hospital insurance, imposes no monthly premium for most enrollees. However, its coverage is considerably limited. Part A predominantly covers inpatient hospital care, skilled nursing facilities, home health care, and hospice care, but it does not extend to routine doctor visits or prescription medications.
Moreover, Part A covers only a portion of these services, meaning you’ll need to meet a deductible of $1,340 (as of 2018) for each benefit period. You could also incur coinsurance charges of $335 daily if hospitalized for over 60 days and $167.50 daily for stays beyond 20 days in a skilled nursing facility. (See also: Four Common Mistakes to Avoid When Enrolling in Medicare)
Medicare Part B
Part B functions similarly to standard health insurance. Most beneficiaries pay a monthly premium, typically deducted from their Social Security checks. As of 2018, the average monthly premium for most beneficiaries stands at $134, but higher earners might pay more.
With Part B, you cover all costs for services until reaching the annual deductible of $183. After you meet this amount, you typically pay 20 percent of Medicare-approved costs for doctor visits, outpatient therapy, and durable medical equipment. However, Medicare Part B does not cover long-term care, routine dental or vision care, hospice care, hearing aids, or fitting exams, and may explain the considerable health care spending estimates provided by Fidelity. (See also: Understanding Medicare’s Various Components)
Calm Your Fears
While this information may not be particularly encouraging, it shouldn’t lead to extreme measures such as resorting to illegal activities or lottery gambling. Several effective strategies can help you manage health care expenses without jeopardizing your retirement.
1. Prioritize your well-being
Maintaining adequate sleep, engaging in regular exercise, and eating a nutritious diet might not seem like a financial strategy, but they can yield returns far greater than many conventional investments. By enhancing your overall health, you may significantly reduce the need for medical expenses as you get older.
That said, it’s crucial to understand that even the healthiest individuals can face unexpected health challenges. Nonetheless, embracing a healthy lifestyle is a smart choice—at the very least, it can enhance your current well-being. (See also: 7 Intelligent Ways to Prioritize Your Health)
2. Explore long-term care insurance
Long-term care costs represent one of the major gaps in Medicare coverage—the assistance some seniors may need with daily living tasks like bathing, dressing, eating, and mobility. Unfortunately, private health insurance typically does not cover these services, leaving retirees who require such care to shoulder the expenses themselves. The Department of Health and Human Services indicates that a 65-year-old today has a 70 percent probability of requiring long-term care at some part of their lives.
Long-term care insurance can bridge this coverage gap by catering to non-medical long-term care expenses once you have completed the “elimination period,” which may last from 20 to 120 days. Until that time, you would be responsible for out-of-pocket costs.
However, acquiring long-term care insurance can be pricey. The costs can differ, but a 60-year-old couple might pay between $2,700 and $5,600 annually for coverage that offers $150 per day over a three-year benefit period. (See also: Identifying the Optimal Age to Purchase Long-Term Care Insurance)
This type of coverage benefits around 20 to 30 percent of retirees with moderate savings, as noted by the Center for Retirement Research at Boston College. For others, depleting their assets to qualify for Medicaid—which would cover long-term care—may prove more beneficial. (See also: Five Approaches to Afford Long-Term Care)
3. Look into health savings accounts
If you’re in good health as you near retirement, enrolling in a health savings account (HSA) may be wise. This account operates similarly to an IRA, enabling families to contribute up to $6,900 (as of 2018) and individuals up to $3,450 using pre-tax earnings. Those over 55 can contribute an extra $1,000 beyond these limits. The funds accumulate tax-deferred, and withdrawals for qualified medical expenses are also not taxed.
The downside is that to qualify for an HSA, you must have a qualifying high-deductible health plan, which should feature individual deductibles of at least $1,350 or family deductibles of $2,700, along with out-of-pocket maximums of $6,650 and $13,300, respectively.
This requirement complicates the decision process. If you remain in good health, HSAs can serve as excellent saving tools since you can also withdraw funds for non-medical purposes penalty-free after age 65 (though taxes apply). Thus, an HSA could be part of your retirement savings, used flexibly for various needs if your health remains stable.
However, should you face health issues before reaching Medicare age, relying on a high-deductible health plan may necessitate depleting your HSA prematurely. (See also: How an HSA Can Benefit Your Retirement)
4. Utilize a Roth IRA for health care savings
Roth IRAs function as tax-advantaged investment accounts where you can deposit already taxed money, allowing earnings to grow tax-deferred. Provided you maintain the Roth IRA for a minimum of five years and are over 59½ years old, withdrawals can be made tax-free. For 2018, you could set aside $5,500 annually, with an additional $1,000 contribution allowance for those aged 50 and above.
This makes Roth IRAs a viable option for allocating funds specifically for healthcare expenses in retirement. Since there’s no tax penalty for withdrawals, you won’t have to worry about how a significant medical expense might impact your tax situation in retirement.
When planning your investments within a Roth IRA, consider your anticipated health status. If you anticipate good health at retirement, focus on growth-oriented stocks, as costly medical care might not arise for a decade or two. Conversely, if you have a known chronic illness or family history of health issues, it’s wise to place most funds in stable investments while designating a smaller portion for growth. (See also: Effective Strategies for Withdrawing Funds from Retirement Accounts)
The Ups and Downs of Retirement Health Care
Health care expenses during retirement shouldn’t catch you off guard. By acknowledging potential costs and recognizing Medicare’s coverage shortcomings, you can effectively strategize for your medical care needs as you grow older. (See also: Follow These Five Steps for Comprehensive Health Care Coverage in Retirement)
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