Retirement Healthcare Costs: What You Need to Know
What are the biggest unknowns potentially threatening your retirement plan? Despite what you may think, it’s not the stock market.
Did you know that a 65-year-old couple retiring today could need roughly $400,000 to cover healthcare expenses in retirement? A new study shows that it’s not market risk or unforeseen family situations you need to fear most when it comes to having enough money in retirement. The greatest risk is longevity, or that you’ll outlive your money.
The second greatest risk? Not having enough money to cover unexpected healthcare costs. Much like everything else, just how much you will incur in medical costs as you age is uncertain. But there are some ways that you can plan for these expenses.
Tip #1: Estimates are estimates.
There are two caveats to remember here: First, your medical insurance plan and your medical needs are not going to be the exact same as that of other retirees. Many estimates take extremes in medical expenses into consideration — extremes that you may or may not face.
Second, if you are one of the unfortunate few who is hit with astronomical expenses, your needs could exceed your estimates.
Either way, rather than being alarmed by projections about what you can expect to spend on your healthcare needs in retirement, use the numbers as a general guideline to help you better prepare.
Tip #2: The old rules of personal finance still apply: Budget and save.
Many of your medical costs in retirement will be predictable expenses that you can budget and save for. Think: monthly health insurance or medicare premiums, annual doctor checkups, preventative health screenings, and monthly prescriptions.
Health insurance premiums will account for roughly 78% of your annual healthcare costs in retirement, and can be factored into your monthly budget. In addition to those costs you can plan for, you can expect to be hit with a number of variable costs. One way to cover those variable costs is by tapping into your savings account or your HSA, if you have one.
Tip #3: Know your Medicare facts.
Medicare, the federal government health plan available to Americans aged 65 and older doesn’t cover all costs. As you plan ahead for retirement healthcare costs, it’s helpful to have a good understanding of Medicare coverage. Here’s a high-level overview:
- Medicare Part A: Covers hospital costs once you meet a deductible.
- Medicare Part B: Optional medical expenses coverage for which you’ll pay an annual premium.
- Medicare Part D: Covers prescription drugs.
- Medicare Advantage plans: All-in-one managed care plans providing the services covered under parts A and B, and that may cover additional services.
- Medigap or supplemental policies: Offered through private insurance to help cover expenses not provided for under Medicare.
Enrolling in Medicare: You want to sign up for the seven-month initial enrollment period that begins three months prior to the month you turn 65. Delaying your enrollment will cost you more, because it brings stiff late enrollment penalties.
If you still plan to be working and covered under an employer’s plan at age 65, then you’ll have the chance to enroll in Medicare during a specified period after you retire. Be sure to weigh the costs of staying on your employer’s plan or shifting to Medicare once you are eligible for Medicare.
Tip #4: Plan for long-term care.
About half of people who live beyond the age of 65 will need long-term care at some point in their lives — and neither Medicare nor private health insurance will pay for those expenses. Out-of-pocket costs for this care is estimated at $140,000.
One option to pay for this kind of care is a long-term care insurance plan. A second option that’s come into vogue more recently is called a hybrid policy: whole life insurance that you can draw from to pay for long-term care. However, these hybrid policies can cost a great deal more than traditional long-term care insurance.
Talk to your financial advisor to learn more about strategies you might use to plan for long-term care needs.
Tip #5: Take care of yourself.
Health conditions and the management of those conditions have a direct correlation to retirees’ healthcare expenses. Properly managing conditions like type 2 diabetes, high blood pressure, and high cholesterol in pre-retirement years could mean savings on healthcare expenses as a retiree.
Whether or not you have a chronic condition, keeping your health in check through healthy eating, regular exercise, and routine doctor visits could mean big savings and a higher quality of life overall.