Simple Ways to Manage Health Care Costs in Retirement if You Plan Now

Most people estimate their retirement spending based on food, gas, utilities, and housing bills. They often overlook healthcare costs.

Not considering retirement healthcare costs might be an expensive oversight since medical expenses are a significant retirement expense. They’ve outpaced inflation for years. One severe illness can destroy your savings.

Talk about price shock! Fidelity Investments estimates that a 65-year-old couple will need $300,000 (after taxes) to cover healthcare costs in retirement. Some 80% of RBC Wealth Management study respondents are “worried about funding healthcare.” According to an April IBD/TIPP poll, about half of Americans worry about retirement healthcare expenses.

Know How Healthcare Expenses Change

Still, you shouldn’t worry much about these scary prospects. For example, you don’t have to pay 20 or 30 years of premiums, deductibles, and copays in one lump sum.

Aging increases healthcare costs. RBC Wealth Management estimates that a healthy 65-74-year-old couple will spend $12,000 annually on healthcare. The cost jumps to $21,000 for couples 75-84 and $38,000 for couples 85 and older.

Your early retirement expenses will be more consistent and manageable. That allows the money you save for medical expenses in 401(k)s, IRAs, health savings accounts (HSAs), and other assets to grow before the large bills arrive.

How can you avoid healthcare costs affecting your lifestyle in retirement? Here are some tips:

Budget For Healthcare Costs

You must consider medical expenses in your financial plan. Estimate how much to save and how to pay for it. 

Consider your health and family history when estimating expenses. Expect to spend more if you smoke or have a chronic condition like diabetes. Consider your location too. Traditional Medicare costs the same worldwide, but Part D and “Medigap” supplemental plans might vary.

Retirement plans are also vital. You must bridge the insurance gap if you retire before Medicare eligibility at 65. COBRA offers 18 months of coverage after you quit a job. Consider also a state health insurance exchange policy or your spouse’s plan.

Healthcare Expenses: Cover Insurance Gaps

Filling coverage gaps is your greatest protection because it reduces price uncertainty. Knowing your costs makes budgeting easier.

Consider Medicare

Many believe Medicare covers all medical expenditures. Not really. It doesn’t cover eye tests, dental, hearing, or nursing home care. Traditional Medicare requires a monthly premium and copayments for eligible services. There’s no annual limit on what you might pay for hospital and out-of-pocket medical expenses.

Medicare can be expensive. Medicare Part A (hospital insurance) has a $1,556 deductible for each benefit period and no premiums. Part B (doctor visits, lab tests, etc.) premiums start at $170.10 per month and can reach $578.30 based on income. After a $233 deductible, you’ll pay 20% of Medicare-covered services.

Part D (prescription medications) and Medigap (private coverage that helps defray costs for Medicare Part A and B services by paying for out-of-pocket expenses that could cost thousands of dollars a year) require an extra premium and deductible.

Check Your Healthcare Cost Options

Check if a privately managed Medicare Advantage plan (Part C), which bundles Parts A, B, and D, is cheaper. Although you’ll still have to pay the government for your Part B premium and possibly a private plan premium, your copays will likely be lower than the 20% copay for doctor visits under standard Medicare. Medicare Advantage caps out-of-pocket costs annually.

You may face a penalty if you don’t enroll in Medicare when you’re first eligible. So, remember to register on time.

Consider LTC

These insurance expenses don’t include long-term care. That’s the need for home, assisted living, or nursing home care. According to Genworth’s “Cost of Care Survey,” an in-home health aide costs $5,148 a month, assisted living $4,500, and a nursing home private room costs $9,034.

How may long-term care expenditures be reduced? If you can afford it, choose a stand-alone long-term care policy or a hybrid life insurance policy with a cash value. Another option is buying a guaranteed income annuity.

Paying out of pocket can be expensive and make it difficult to pass on assets to heirs. 

Carefully Invest For Medical Costs 

Roth IRAs, 401(k)s, and HSAs (health savings accounts) are good places to start saving early. The objective is to have adequate assets when needed. Create a healthcare savings bucket precisely as you do for emergencies, short-term needs, and retirement.

You should establish a fixed income stream for health bills that aren’t affected by market volatility or taxed every time you pay.

Use IRAs

Roth IRA and 401(k) withdrawals are tax-free. Another tax-friendly option is using a high-deductible HSA as an investing account since they are triple-tax-free. Money enters, grows, and leaves tax-free. Invest the annual HSA maximum contribution ($7,300 for families in 2022) in growth investments for future usage. In the meantime, pay out-of-pocket costs with other accounts.

You receive tax breaks at every level. It’s great to finance copays and other fees without using your HSA.

If you don’t have a Roth IRA, now’s a good time for conversion. Due to the market drop, the taxes you’ll pay to convert are likely lower than in early January.

A diversified portfolio allows you to use easy-to-access cash when needed and grow money in stocks for future healthcare costs.

Contact Information:
Email: [email protected]
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I grew up in Dubuque, Iowa, where I learned the concepts of hard work and the value of a dollar. I spent years in Boy Scouts and achieved the honor of Eagle Scout. I graduated from Iowa State University and moved to Chicago and spent a few years managing restaurants. I then started working in financial services and insurance helping families prepare for the high cost of college for their children. After spending years in the insurance industry, I moved to Arizona and started working with Federal Employees offing education and options on their benefits. I became a Financial Advisor / Fiduciary to further help people properly plan for the future. I enjoy cooking and traveling in my free time.

Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice filed, or is excluded from notice filing requirements. BWM does not accept or take responsibility for acting on time-sensitive instructions sent by email or other electronic means. Content shared or published through this medium is only intended for an audience in the States the Advisor is licensed in. If you are not the intended recipient, you are hereby notified that any dissemination, distribution, or copy of this transmission is strictly prohibited. If you receive this communication in error, please immediately notify the sender. The information included should not be considered investment advice. There are risks involved with investing which may include market fluctuation and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making an investment decision.

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