Six Strategies to Help You Prepare for Medical Costs in Retirement

Six Strategies to Help You Prepare for Medical Costs in Retirement

Options for Taking Charge of Your Financial Future and Avoiding Costly Surprises

Six Strategies to Help You Prepare for Medical Costs in Retirement
Wednesday, 24 March 2021

Retirement is an exciting and rewarding phase of life for those who have planned properly. Chances are, you have been saving for it – and dreaming about it – for many years. If you’ve been strategic and disciplined, your retirement savings likely includes a plan for covering your health care needs, but did you know that a healthy adult retiring at age 65 will spend an average of $387,644 in health expenses for the remainder of their lifetime?

With such a hefty price tag, it is common to underestimate the amount you will need to save for medical costs in retirement. Below, we’ll discuss six strategies you can use to boost your savings and gain increased peace of mind.

Understand Your Options

The world of health care can be incredibly confusing and frustrating, but the more you understand, the more control you have. Knowing your options for health insurance and what you can do to fill in the gaps can go a long way toward saving you money and ensuring you won’t be in for a financial surprise.

The most common option for retirees is to use Medicare. You become eligible for Medicare when you turn 65, or earlier due to certain medical conditions. It is your choice how many of the plan components you sign up for:

  • Plan A — covers hospitalizations, and it is free for most people
  • Plan B — includes physician visits and outpatient care
  • Plan D — covers prescription drugs

When breaking down the average medical costs in retirement, most people pay 40% on premiums, 40% on copays and out-of-pocket expenses, and 20% on medications. Even with insurance coverage, some of these costs can become overwhelming. If you choose to, you can purchase additional insurance that will help cover some of those costs. This type of insurance is commonly referred to as Medigap.

Another option is to continue with private insurance and switch to a Medicare Advantage Plan. Depending on your needs and finances, this may be the best option for you. The maximum out-of-pocket costs can be quite high for private plans, so having a savings fund to match that out-of-pocket expense is smart in case of an unexpected illness.


SEE ALSO: Is Early Retirement a Good Idea?


2. Contribute to a Health Savings Account

Consider contributing to a Health Savings Account (HSA) while you’re saving for retirement. To do so, you’ll need to have an eligible health plan with a deductible of at least $1,400 for an individual or $2,800 for a family. This is called a High Deductible Health Plan (HDHP). If your health insurance is provided through an employer, check to see if they have a matching contribution program in place.

The benefits of an HSA come from its versatility when making withdrawals. An HSA can pay for Part B and Part D Medicare premiums, dental, vision, hearing, and over-the-counter medication. HSA money is either not taxed if your insurance comes through your employer or is tax-deductible if you have a self-funded plan.

There are some HSA rules to be aware of. Once you turn 65 and have started Medicare, you can no longer make contributions to the account. However, there are no restrictions for withdrawing money once you start Medicare. There are also caps on how much you can deposit per year, set by the IRS. In 2021, you can deposit a maximum of $3,600 for an individual or $7,200 for a family. An HSA is a smart choice if you are interested in paying for medical expenses from a tax-free account.

3. Participate in Medicare Open Enrollment Every Year

Choosing the right medical coverage can feel daunting. After you’ve made a decision, it can be hard to motivate yourself to look again when the next year rolls around. However, putting in the time to explore plan options during open enrollment each year is worth it! The open enrollment period for Medicare Advantage and Part D happens every year from October 15 – December 7. In September, you’ll want to watch for a notification about how your current plan is changing.

Health plans do tend to change every year; this affects the cost of the premium, what is covered, which providers are in your network, and the cost of medications. Note any negative changes to your current plan. If there is a different plan on the market that will work better for you, it may be time to change.

A change in your health may also dictate what kind of coverage you want. If there is an emphasis needed on specialists or an increase in medications, finding the right plan will maximize your savings.

4. Challenge the High-Income Surcharge for Medicare

In 2021, if you are married and jointly making $176,000 or less, Medicare Plan B costs $148.50 per month. If you are earning above that threshold, you will land in a higher payment bracket, and you could end up paying as much as $504.90 per month. These higher brackets are the surcharge for high-income earners.

The bracket that you end up in is calculated based on your most recent tax return on file. So, in 2021, you will be paying for Medicare as if you were making your income from 2019. If your income has dropped, you can challenge the rate. Major life events like retirement, death of a spouse, job transition, divorce, or marriage can affect your income.

When you receive notice of your adjusted rate, you can challenge the decision by filing an SSA-44 form. You will need to provide paperwork supporting your claim and either an adjusted tax statement or an estimate to prove your actual income to receive the reduction to your medical costs.


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


5. Think Outside the Box

Another way to reduce medical costs in retirement is to look outside the popular model of health care. Two ways to move outside the system are alternative medications and preventative care.

If you are required to take medication, there are alternatives available to you outside the initial prescription you receive from your doctor. You can ask them to prescribe a generic form of the drug or a therapeutic alternative. There are also many apps available that scour the internet or organize bulk purchasing to lower medication costs. These include companies like GoodRX and Capsule.

Preventative care is a great way to cut down on costs before they occur. For example, exercise can lengthen your life expectancy and quality of life. Getting moderate exercise daily can help increase immunity, resilience, prevent injury, and combat depression. Combining an active lifestyle with healthy eating can go even further in preventing the possible health costs you could incur in the future.

6. Plan for Long-Term Care

Long-term care is something you may want to consider in your retirement planning. The national average monthly payment for a home health aide is $4,500, and the average monthly payment for a private room at a retirement home is $8,800. These are huge costs usually not covered by Medicare. Medicaid will help cover some costs, but the options for care are restricted and it will only become available to you once your funds are significantly diminished.

One option to help pay for your future care needs is long-term care insurance. Having insurance can be a lifesaver if you are diagnosed with an unexpected long-term illness like Parkinson’s or Alzheimer’s. There are several hybrid insurance options available, as well. These options offer a payout to the family in case of death if the long-term benefits were never used. It’s also worth mentioning, long-term care insurance is considered a valid medical expense for most HSAs.

Final Thoughts: Planning for Tomorrow

None of us can predict the future, but medical costs often increase as we age. Despite these high costs, with forethought and planning, you can still enjoy a peaceful retirement free from financial stressors. Understanding your options and building the strategies that are right for you can help you create a plan to cover your medical costs in retirement and ensure you are able to enjoy your golden years.

If you’re in need of professional financial guidance as you plan for your financial future, please reach out to us today. At Charles Carroll, we are committed to providing personalized financial planning and investment management based upon your unique needs, goals, and aspirations.

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