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Tips for Planning for Healthcare Costs in Retirement

Alissa Sauer
By Alissa SauerSeptember 9, 2019
Tips for Planning for Healthcare Costs in Retirement

Even the best-laid plans can be upended by dramatic outliers. In fact, Wall Street has a phrase for it. Known as “tail risk,” healthcare costs can derail even the most well-planned financial plan.

Learn more about how you can expect the unexpected and better prepare for healthcare costs in retirement.

Healthcare Costs Are Often Overlooked in Retirement Planning

It’s no secret that Americans are largely unprepared for retirement. In fact, the 2018 Planning and Progress Study revealed that 78% of Americans are not prepared and that a startling 21% have no retirement savings at all.

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However little Americans are unprepared for retirement, they are even more unprepared for healthcare costs. Healthcare is one of the largest expenses in the United States today and is one major reason why Americans feel they are unable to save for retirement.

A couple who retires in 2017 can expect to spend $275,000 on average for healthcare costs throughout retirement. Unfortunately, unlike previous generations, seniors today do not typically have employer or union-sponsored health benefits.

As life expectancy increases and people retire an average of three years before they are eligible for Medicare benefits, covering healthcare costs in retirement can seem unrealistic.

Steve Feinschreiber, senior vice president of the Financial Solutions Group at Fidelity, accurately notes:

“Healthcare is creating a retirement cost gap for many pre-retirees. Many people assume Medicare will cover all your healthcare costs in retirement, but it doesn’t. We estimate that about 15% of the average retiree’s annual expenses will be used for healthcare-related expenses, including Medicare premiums and out-of-pocket expenses. So, you should carefully weigh all your options.”

5 Tips to Better Prepare for Healthcare Costs

While healthcare costs can seem overwhelming, it is possible to prepare for unexpected medical costs in retirement.

Here are five ways to prepare for the unexpected:

1. Carefully consider when to retire.

If you can continue working and are concerned about retirement savings, working longer is a practical way to save more money. If you are collecting a paycheck, you are more likely to delay filing for Social Security, ultimately increasing your retirement benefit. You will also be able to continue contributing to an employer’s retirement savings plan, and earnings on investment portfolios will continue to grow.

2. Discuss a health savings account (HSA) with a financial advisor.

An HSA is a tax-advantaged account that can be used to pay for current or future healthcare expenses. You can only contribute to an HSA if you have a high deductible health plan, generally, one that only covers preventative care before the deductible. Discuss the advantages to an HSA with your financial advisor to determine if this particular account is right for you and your family.

3. Estimate how much you will need to cover health care costs in retirement.

Experts estimate it will cost a healthy couple who retires today around $275,000 to cover healthcare costs in retirement. However, that number is only an average. Take your own personal health into consideration to have a greater understanding of how much you will need. Of course, it is impossible to plan for medical emergencies, but taking the time now to take an inventory of your current health and compare it to medical costs can save you a financial burden in the future.

4. Plan for long-term care services.

In addition to the $275,000 of estimated healthcare costs today’s retirees need, most people over the age of 65 will need some type of long-term care and Medicare and private insurance generally do not cover custodial expenses required by long-term care. Consider how you will pay for long-term care if the need arises. Options include relying on family members, home-equity, long-term care insurance, earmarking a portion of your savings, or spending down to Medicaid.

5. Review Medicare options.

As you approach the age of 65, review all of your Medicare options. You may decide to pay a higher premium to avoid paying out-of-pocket costs. Factor in the number of times you anticipate seeing a doctor and then copay and coinsurance per visit. You can switch Medicare plans if needs change over time, but generally, it makes sense to enroll in Medicare Parts A, B, and D early to avoid a late enrollment penalty later.

No matter how you look at it, Americans must prepare for healthcare costs in retirement, and sooner, rather than later.

Find a fiduciary financial advisor who can help you understand your investment options, expand your portfolio, and make your financial planning for retirement a success.

What other suggestions do you have for planning for healthcare costs in retirement? We’d like to hear your tips in the comments below.

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Alissa Sauer
Alissa Sauer

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