Among the major concerns for many retirees is how much they spend on healthcare in retirement; it is usually ranked among the biggest expenses. As one grows older, one needs more medical attention, so these costs could increase dramatically due to increased doctor visits, prescription medications, long-term care, and probable hospital stays.
For instance, in the United States, it is at age 65 that Medicare kicks in and pays for basic care; however, it does not pay for the following important healthcare expenses: dental care, vision, hearing aids, and long-term care. These out-of-pocket expenses include premiums, deductibles, and copayments, not to mention other services that may not be covered. Long-term care may be even more expensive and could be supplemented through insurance or savings strategies. A few common strategies to help pay for future healthcare costs are Health Savings Accounts and long-term care insurance.
Medical expenses can eat away retirement savings rather quickly if not accounted for properly, so one must understand these healthcare costs as a component of an overall retirement strategy.
How to prepare for medical expenses in retirement?
Medical expense planning for your U.S. retirement is important in ensuring financial security during your golden years. The cost of healthcare will most probably increase as you get older, and it's also an area to be watched and planned for in any retirement strategy. Important steps to take include:
1. Estimate Healthcare Costs in Retirement
It's a good idea to have an idea of some of the health care expenses you may incur in retirement. For example, an average couple retiring in 2023 at age 65 can expect to pay approximately $315,000 for medical expenses in retirement, not including long-term care costs. Expenses include Medicare premiums, supplemental insurance premiums, out-of-pocket expenses, prescription drugs, and expenses for services not covered under Medicare, such as routine dental, vision, and hearing care. Consider these expenses when developing your retirement savings goals.
2. Max Out HSAs (Health Savings Accounts)
If you have an HDHP, then consider making a contribution to a Health Savings Account. HSAs offer triple tax advantages: there is a tax deduction for the money you contribute, and any growth is tax-free. The funds in an HSA carry over from year to year, and once you reach age 65, you can use the funds for paying Medicare premiums, deductibles, copays, and other qualified medical expenses. Take full advantage of this throughout your working years to ensure less spending on healthcare in later life.
3. Know About Medicare and Additional Coverage
Medicare, available from age 65, will go a long way toward covering healthcare costs but does not cover all health care costs. There is A to D of Medicare:
Part A (hospital insurance)
Part B (medical insurance)
Part C (Medicare Advantage plans)
Part D (prescription drug coverage)
Original Medicare does not cover dental, nor vision, nor hearing aids, nor long-term care, and you will still be responsible for out-of-pocket expenses, including premiums, deductibles, and copays. You may want to purchase a Medigap policy-Medicare Supplement Insurance-to help pay for some of these costs. Or, you can look into other Medicare Advantage plans that package these services together in one plan for broader coverage.
4. Consider Long-Term Care Insurance
Medicare does not cover long-term care, including assisted living, home health care, or nursing home care. And it can be very costly: the average annual cost for a private room in a nursing home exceeds $100,000 annually. Long-term care insurance pays for extended care expenses and can protect you from spending down all your retirement savings if you do need extended care. That said, premiums are generally more affordable in your 50s or early 60s, and are probably a better time to buy LTC insurance.
5. Build a Healthcare Emergency Fund
Along with retirement savings, also set aside money for unexpected health expenses. Other than Medicare and additional insurance coverage, one can still have sudden bills related to emergency surgery or specialist visits or other advanced treatments. In this respect, a healthcare-oriented emergency fund ensures that these expenses won't sidetrack the overall retirement plan.
6. Stay Healthy and Invest in Preventive Care
One of the best ways you can control healthcare costs in retirement is by investing in your health today. The most proactive way to avoid and minimize chronic conditions that can elevate medical costs is by living a healthy lifestyle. Regular check-ups, preventive screenings, and a healthy diet and exercise routine can go a long way in keeping future healthcare expenses in check.
7. Plan for Prescription Drug Costs
Prescription drug prices keep on rising, and it becomes an extremely important point in the management of their cost within retirement. If on Medicare, you are supposed to sign up for Part D for coverage of prescription medication. Investigate generic drugs, mail-order services, and pharmaceutical assistance programs that could help reduce costs.
8. Consider a Retirement Plan That Accounts for Healthcare
Consider healthcare costs when setting up your retirement income strategy. This may include adjusting your investment strategy to make sure enough liquid assets are available when they are needed. See a financial planner about whether your retirement savings are on track to fund your medical expenses.
Steps to mitigate health care costs in retirement
Managing high healthcare costs in retirement requires careful planning and financial discipline. Financial experts recommend taking the following steps to effectively prepare for these expenses:
1. Understand Your Healthcare Costs
Be aware of the three primary categories of healthcare expenses you will need to manage:
- Premiums: These are the monthly amounts you pay for health insurance coverage. While Medicare Part A may have no premium if you have paid Medicare taxes for 40 quarters (10 years), Part B premiums vary based on income.
- Out-of-Pocket Expenses: This includes any costs you pay directly for healthcare services. Although insurance plans may have annual out-of-pocket maximums, you will be responsible for any expenses not covered by your plan.
- Long-Term Care: This can be a significant portion of your retirement healthcare costs, covering services like nursing home stays or in-home care. For instance, the average cost for a private room in a nursing home in 2024 is around $120,300 annually, which can greatly impact your retirement budget.
2. Familiarize Yourself with Medicare
Medicare will play a crucial role in covering your healthcare costs in retirement. It's important to understand its various components:
- Part A: Typically premium-free if you’ve paid Medicare taxes for 40 quarters, covering inpatient hospital stays, skilled nursing facility care, hospice care, and some home health services.
- Part B: Requires a monthly premium based on income and covers outpatient care, doctor visits, and other medical services. Both Parts A and B include deductibles and coinsurance.
- Supplemental Coverage: Medigap policies and Medicare Advantage plans can help cover gaps in Medicare. Medigap offers more predictable costs but requires an additional premium, whereas Medicare Advantage may have lower premiums but higher out-of-pocket expenses and limited coverage.
3. Explore Alternatives to Coverage Gaps
In addition to Medicare and Medigap, explore other possible additional insurance options that may help close the gap in coverage. For example, Medicare does not cover long-term care, nor is this typically covered under a standard health insurance policy. One option is to purchase long-term care insurance. Another option involves the living benefits available with some life insurance policies; these can be utilized to defray the costs of your long-term care.
4. Health Savings Account-Tax-Free
If you have a high-deductible health plan, an HSA can be an extraordinarily useful way to manage retirement healthcare costs. For starters, HSAs boast triple tax advantages: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free. If you don't have a high-deductible health plan, consider other options such as flexible spending accounts or health reimbursement arrangements, though neither may be quite as valuable toward retirement savings.
5. Stay Ahead with Regular Checkups
Not all health variables are under your control, but regular checkups and screenings can go a long way in keeping you abreast of your health status for necessary lifestyle adjustments and averting health issues before they also become costly.
Understanding healthcare expenses, taking advantage of tax-advantaged savings vehicles, and continued good health can go a long way in managing your expenses and financial stability in your retirement years.
Conclusion
Healthcare expenses are among the most significant challenges retirees face, making it essential to plan strategically. From understanding Medicare and maximizing HSAs to investing in long-term care insurance and building a healthcare emergency fund, proactive measures can help mitigate financial strain. Staying healthy through preventive care and planning for prescription drug costs are also critical steps to ensure a financially secure and healthy retirement.
Incorporating stable investment options into your retirement plan can further enhance your financial security. For example, Compound Real Estate Bonds (CREB) offers an 8.5% APY, providing a fixed income that can be an excellent supplement to cover healthcare costs and other retirement expenses. With no fees, anytime withdrawals, and features like auto-investing, CREB is a smart addition to a retirement portfolio. By combining strategic healthcare planning with reliable investment solutions like CREB, retirees can navigate their golden years with confidence and peace of mind.
