Planning for Rising Healthcare Costs in Retirement

According to a recent study on retiree health care cost estimates, an average retired couple of 65 years in 2020 may need approximately $295,000 saved (after tax) to cover health care expenses in retirement. Of course, this amount will depend on when and where you retire, how healthy you are, and how long you live.

What remains steady is that healthcare can be a sizable expense and might even be the most considerable expense for many. Therefore, when planning for your retirement, it is vital to keep in mind the impact of healthcare costs in the future.  Planning for retirement gets even more crucial when you know that you may not have employer-sponsored retiree healthcare benefits.

In this article, we will be looking at ways to plan for your retirement, given the rising healthcare costs.

How do I Meet Rising Healthcare Costs? 

Healthcare costs have increased at a rate that exceeds the average inflation. Inflation is the rate at which the cost of goods and services increases annually. Inflation is what made your earlier $2 coffee cost you $4 now, and it is likely that the price will increase in the future. Inflation also affects healthcare costs. Most people assume Medicare will cover their expenses when they retire, but this is not the case.

The average retirement age for Americans is 62 years. This is three years before one can elect to enroll in Medicare. Also, Original Medicare, referred to as Parts A and B, has its limitations. People often do not account for expenses that are not covered by Medicare, such as dental coverage, basic vision, and over-the-counter medicines. It should be noted that Medicare Advantage plans typically do include these expenses but as private offerings. What stands out is that no part of Medicare offers coverage for long-term care.

Medicare can get quite complicated and confusing. When you get started, you should give enough thought to the following questions:

  • Which plan gives you the best coverage to meet your health needs?
  • Your employer may be required to offer you coverage, but is that your best option?
  • What is more expensive: staying in your employer’s plan or joining Medicare?
  • Can your spouse or partner remain a part of your employer’s plan if you decide to leave?

It is estimated that about 15 percent of retirees’ annual expenses will be dedicated to healthcare-related costs. This includes only Medicare premiums and out-of-pocket expenses. In reality, this is a very modest assumption. However, it is subject to various factors such as how healthy one is when he or she retires and the lifestyle spent. It is fairly common that people tend to underestimate healthcare expenses when planning for retirement. Make sure to weigh all your options before assigning a budget.

How to Plan Healthcare Costs for Retirement

Setting Up your Plan

There are two basic steps to get your plan in place: evaluating how much money comes in and how much money is spent. 

On average, a person in their 60s is expected to have an estimated median savings of $172,000. Those 65 years or older spend an average of $3,800 per month. Social security can look after only 40 percent of the working-life income. As such, one must make the most of the earnings and budget healthcare accordingly. However, budgeting also is dependent on one’s age and overall health status. The healthier one is, the lesser money they would need to allocate. Although this might be the general view, healthcare is a contingency cost that requires careful deliberation.

The amount needed will also factor in which account you use to meet your healthcare expenditure – for example, 401(k), HSA, IRA, or taxable accounts. 

If you’re still employed, and your company offers an HSA-eligible health plan, consider signing up and contributing to the health savings account (HSA). An HSA can help you save a significant amount in taxes when withdrawing money to meet health care costs during retirement. You can even save pre-tax money, which has the potential to grow and be withdrawn tax-free for federal and state tax purposes (if used for qualified medical expenses).

If you are relying on Medicare to help cover healthcare expenses in retirement, then you need to plan for deductibles, premiums, and out-of-pocket costs in advance. Each year the Medicare premiums, deductibles, and co-insurance rates are adjusted according to the Social Security Act. For 2021, the standard deductible amount for Medicare Part A is set at $1,484. Medicare Part A deals with inpatient hospitals, skilled nursing facilities, and some home health care services.

Medicare Part B covers physician services, outpatient hospital services, certain home health services, durable medical equipment, and certain other medical and health services not covered by Medicare Part A. The monthly premium for 2021 for Part B is set at $148.50, and the annual deduction for the year has been calculated at $203.

The base premium for Part D (an optional program that pays for self-administered prescription drugs through prescription drug insurance premiums) is fixed at $33.06 per month in 2021. Most Part D plans have an annual deductible of up to $445.

The Medicare Advantage plan is another plan that a would-be retiree can subscribe to. It is, however, not offered by the federal government but through private insurers, who fix the premiums, with Parts A, B, and D.  Based on the insurer and what the policy covers, the payments for a Medicare Advantage plan could differ. These plans typically cover the same costs as that of original Medicare, along with Part D prescription drug coverage. Some plans may also cover vision, dental, and hearing expenses.

How do I Save For Rising Healthcare Costs Before Retirement?

The ever-increasing healthcare costs don’t mean you need to put away all your earnings to cover healthcare. There are ways that help pre and early retirees build a safety net for themselves. With retirement nearing, there will be several important decisions to make, which could include: when to stop being a part of the workforce, when to start with Social Security, how to take care of the medical expense, and how to keep a steady cash flow for your retirement. These decisions rely on each other and could make a huge difference in your lifestyle.

We’ve already talked about health savings accounts (HSA). These are available with high-deductible health plans called HDHP and offer some great tax advantages.

About one-third of “early retirees” who claim Social Security at age 62 do so intending to meet the healthcare expenses until they can enroll for Medicare coverage at age 65. But if you can postpone retirement or save enough for healthcare expenses until 65 years of age, then you may be able to defer your Social Security benefits. In general, the longer you wait until age 70 to take Social Security benefits, the more you can accumulate.

How do I Save For Rising Healthcare Costs When Retired at 65?

If you’re close to 65 years, spend time and effort to know and learn about Medicare. Review all your Medicare options. When you turn 65 years old, you should remember to enroll within your seven-month initial signing up period, which starts three months before you turn 65.

Read up and understand everything about Medicare and how it works, the Medicare components, that is, Parts A, B, and D, including Medicare Advantage and other insurance policies.

A Brief outline of Medicare in the United States:

  • Part A covers hospital expenses after you meet a deductible. 
  • Part B is optional coverage for medical expenses, and it requires an annual premium.
  • Part D is meant for prescription drug coverage.
  • Medicare Advantage plans are the one-stop managed care plans providing the services covered under Parts A and B, and Medicare Advantage may also cover other services that are excluded under Parts A and B, including Part D prescription drug coverage.
  • Medigap policies are additional policies offered by private insurance companies to supplement expenses that Medicare Parts A and B do not cover.

While you could pay a higher premium for your Medicare policies, it is advisable to not pay too much out-of-pocket at your annual visits to the hospital. Consider the costs of the annual premiums and copays (Copayment is a flat fee that you pay on the spot each time you go to your doctor or fill a prescription) at various levels of the supplemental insurance. Compare this with the number of visits and the co-pays or co-insurance you pay up every visit. This is one way to try to offset or minimize the out-of-pocket expenses to the maximum extent possible.

You can even switch Medicare plans as you don’t have to commit to a plan forever. You can make a change according to your age and your situation. It generally is wise to enroll in Medicare Parts A, B, and D initially because there is a late enrollment penalty levied.

How do I Save For Rising Healthcare Costs When Employed at 65?

If you’re 65 years old and still working, and you are eligible for health insurance through your employer or your spouse’s employer, you will have the option to sign up for Medicare when you leave your employer’s plan through a Special Enrollment Period.

Apart from the Medicare options to consider, if your spouse or partner continues to be employed, they may be able to cover you through their healthcare plan. Contact your HR department to help you evaluate all your options and costs, with special attention to any restrictions that may impede your plans. 

It would be best if you kept in mind that the Original Medicare (Parts A and B) provided by the Federal government does not offer complete coverage, and an assessment of what more you require is imperative. It is in your best interest to avoid any gaps in coverage.

A qualified financial advisor will be able to help you find the right mix of insurance policies that suit your financial situation apart from helping you make up for the gaps in Medicare. To get in touch with a financial advisor, simply answer a few questions on Paladin’s free Match Tool and get connected with the right financial advisor for your needs.

Long-Term Care Insurance for Covering Healthcare Costs

Due to the gaps left open by the federal Medicare system, subscribing to long-term care insurance offered by private firms can prove to be a blessing in disguise. As people age, many may require help with everyday activities of daily living such as dressing, bathing, eating, toileting, transferring (getting in and out of a bed or chair), walking, etc. In some unfortunate situations, some form of cognitive impairment may lead to people requiring supervision from a very young age. These are contingencies that families need to prepare for, as it is difficult to find insurance after the onset of the health issues. It is estimated that nearly 70% of individuals above 65 years of age will require some kind of long-term care services during their lifetime. Currently, 40% of those receiving long-term care services in America are between 18 and 64 years of age. Such services are obviously not cheap. Long-term care insurance could be the solution to this.

Long-term care insurance (LTC) is an insurance product that helps pay for the costs associated with long-term care that are generally not covered by health insurance or Medicare. A policy of this type can pay a monthly benefit which will be contributed towards long-term care for a two or three-year period. 

However, note that such long-term policies may not be affordable for everyone. Long-term care policies have quite expensive premium costs, making them unappealing to Medicaid qualifying individuals (who may have a subsidized cost of care).

The wealthy, on the other hand, may find long-term care insurance financially inefficient. One workaround for them may be to buy a life insurance policy that has the option of including a long-term care insurance provision.

How do I Account for Rising Healthcare Costs in Retirement?

As you plan for health care expenses throughout your retirement—however far off the retirement age might be— you should understand how budgeting and making payments for anticipated healthcare expenses fit into your overall retirement income plan, as dependence on healthcare tends to increase as one age.

In a report by the Kaiser Family Foundation, the percentage of household budgets spent on healthcare is almost thrice as that for retirees on Medicare as for working households (14% versus 5%).

A word of advice that holds, no matter how much the healthcare costs rise, is to plan in accordance with your lifestyle, considering your age, your earnings, access to benefits, and your savings, and to gauge your financial situation and weigh all your options accordingly. 

Let’s go through a couple of short examples to illustrate this point. Say you are 50 years or older, you may make up for a savings shortfall with additional contributions to your 401(k) or IRA. Similarly, if you are 55 years or older, you can contribute an additional $1,000 annually to your health savings account. This way, you can plan and implement your healthcare budget without being burdened by the thought of having to save and set aside savings for medical expenses.

Preplanning and preallocation of funds are like a “stitch in time to save nine”’. As you age, not only does your cost of healthcare increase, your insurance costs increase too. Therefore, the earlier, the better.

Create a strategic plan with a structured and wise approach that will help you accumulate enough to cover your healthcare expenses. In an ideal situation, it is highly recommended that you should first connect with an advisor – someone who can help you sort the plan, the budget, set aside money for healthcare and other expenses, and help you save. This will give you an idea if your savings are on track, i.e., if you’re saving enough to suit your lifestyle choices.

Another way you can save is to learn how to be more practical and cut expenditure on prescription drugs. You can do so by understanding the basics of the plan you opt for. 

To sum it up

One can be easily overwhelmed by healthcare spending and understandably so. Healthcare is a major component of the budget for retirement, and it takes a great deal of effort and quite a sum of money to have an intact medical plan. This can be taken care of to a large extent if you estimate the costs, learn and understand the basics, and direct and strategize your plan towards drafting an efficient strategy. 

An easier way to approach this task is to seek advice from a financial professional. Get in touch with a qualified advisor who can help you estimate the costs – of your current lifestyle, of your requirement ahead, and of your allocation for retirement, inclusive of healthcare expenses.

Match with a financial fiduciary from your own area on Paladin Registry’s Search Tool with a few simple clicks. Interview the advisors before engaging them to find your partner to help you get started on your journey to a comfortable retired living. 

To learn more about the author William Hayslett view his short bio.

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