Are You Prepared for the High Cost of Health Care in Retirement?

Are You Prepared for the High Cost of Health Care in Retirement?

Too Many Retirees Fail to Properly Budget for their Health Needs

Are You Prepared for the High Cost of Health Care in Retirement?
Wednesday, 30 September 2020

Planning for retirement isn’t complete without budgeting, and it’s tempting to focus on all the fun things you’re planning – travel, golf, and spoiling your grandkids, to name a few. After all, you worked hard to make it to this point and it’s natural to want to enjoy your nest egg. You’ve earned it! However, your retirement budget will be about much more than your vacation bucket list and greens fees. In fact, much of it will go toward necessary costs, and chief among these is health care in retirement.

It’s probably not a surprise to you that health care won’t be a minor line item in your retirement budget. Much has been made in recent years of the fact that retirees can expect to pay hefty sums for medical care, even after they become eligible for Medicare at age 65. A recent study by Fidelity showed that a 65-year-old couple retiring in 2020 will pay nearly $300,000 in health care costs over their lifetime.

That number can certainly feel overwhelming. So, where’s a soon-to-be retiree to begin? Below we’ll cover three steps you can take to plan ahead, as well as minimize your health care expenses in retirement.

Step 1: Learn Medicare Inside Out

Does waving goodbye to your health insurance plan seem appealing to you? Many retirees are excited at the prospect of filing for Medicare, which everyone must do at age 65. While it’s true there are many benefits to eschewing private insurance plans in favor of this longstanding government program, many retirees underestimate how much Medicare costs, while also overestimating how much it will cover. Here’s a Medicare cost and coverage breakdown to help you anticipate your budgeting needs.


SEE ALSO: Understanding How Different Types of Retirement Savings are Taxed


Medicare Part A

This part of Medicare does not require a premium, as long as you paid Medicare taxes while working. If you didn’t, you’re looking at premiums of up to $437 per month. Part A includes coverage for hospital visits.

Medicare Part B

This is where you’ll find your coverage for outpatient doctors’ services, and your premium depends on your income. It could be as low as $135.50 per month, or as high as $460.50. You will also have to pay copays, along with some out-of-pocket expenses.

Medicare Part C

This portion of your coverage is commonly called Medicare Advantage, and these are Medicare health plans provided by private companies that contract with the federal government. They can cover Medicare Parts A, B, and D, along with other benefits such as hearing, vision or dental care (which are not covered by Parts A and B). For these plans, your benefits and your costs will vary by state.

Medicare Part D

Part D plans specifically help to cover prescription drug costs. You can purchase a stand-alone plan, or you can opt for a Medicare Advantage plan that includes drug coverage.

Step 2: Consider a Health Savings Account (HSA)

If you’re looking for a tax-advantaged way to plan for higher health care costs in retirement, HSAs are a savvy option. They are only available to you if you have a high-deductible health plan (HDHP), however. If you do, you can contribute pre-tax dollars to use for qualified medical expenses. In 2020, you may contribute up to $3,500 for single coverage and up to $7,000 for family plan coverage. Those aged 55 or older may contribute an additional $1,000.

You may benefit from an HSA is you’re already maxing out contributions to your other tax-advantaged accounts, like your 401(k). Your HSA funds can be rolled over and you aren’t required to use them within a certain timeframe. This gives you the opportunity to save up quite the health care nest egg over time. Once you’re enrolled in Medicare, you won’t be able to contribute further. However, you may still withdraw and use your HSA savings.


SEE ALSO: The Unhappy Retirement: Why Traditional Retirement Planning for Couples is Flawed


Step 3: Don’t Ignore Long-Term Care Plans

It’s emotional to think about some of the realities of aging, including that you may not be able to care for all your own needs. Data suggests this will be true for about half of adults over age 65, yet nearly 75 percent of retirees have not yet planned for their own long-term care needs. This could prove to be a financially devastating oversight, as 15 percent of retirees can expect to spend more than $250,000 on long-term care needs.

Now, it could be that you won’t fall into the 15 percent, or that you have family members who will provide care to you free of charge. Since no one knows the future, however, you might at least want to plan based on these averages:

  • Nursing homes, which provide round-the-clock care, can cost an average of $89,000 to $103,000 per year. Costs differ based upon semi-private or private rooms.
  • Assisted living facilities, which are great for those who just need a bit of extra help with things like meals or housekeeping, can be quite costly. The average monthly payment for a studio space is $4,027, while one- and two-bedroom units average $4,400-$4,800 per month.
  • Home care, usually through home health aides, comes out to about $23 per hour on average, though that number increases to $139 an hour for a registered nurse.

If you’d like an assist in your long-term care planning, check out this calculator to help you determine the amount you might need.

Final Thoughts on Preparing for Health Care in Retirement

Taking the three steps above can feel pretty heavy. No one enjoys thinking about the health challenges they may face in the future, but it’s a fact of life that we must all come to terms with as we age. Planning and forethought allow you to develop a solid strategy that can leave you free to budget more of your retirement money towards the things and people you love, while having peace of mind about your health care costs, too. And peace of mind in retirement is something you simply cannot put a price tag on. 

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