You might assume that retirement planning revolves solely around the enjoyable and fulfilling aspects you’re saving up for: home renovations, globetrotting adventures, spoiling grandchildren, and relishing life’s pleasures. However, focusing solely on these aspects neglects a crucial component of your future financial security: health care.
The reality is that health care expenses could potentially be your most significant cost in retirement—by a considerable margin. Each year, Fidelity computes the average expenditure on medical needs for a 65-year-old couple retiring in that period. In 2018, Fidelity estimated that the average couple would require $280,000 in today’s currency to cover medical expenses during retirement—and this figure doesn’t even include long-term care costs.
Though this figure may induce some anxiety, there’s no need to panic. Even individuals with average incomes can take steps to prepare for retirement health care costs without resorting to drastic measures like depleting savings, relying on family support, or attempting self-medication. Here’s what you should understand about health care during retirement and how to ready yourself and your finances for it.
Your health during retirement
Let’s address the less-than-pleasant truth upfront: It’s probable that your health will decline in retirement.
In many ways, contemplating declining health is more challenging than facing mortality, as the inevitability of the latter is understood. This is evidenced by statistics comparing preparation for death to preparation for declining health in retirement. While 42 percent of Americans have a will or estate plan, according to a Care.com survey, the Economic Policy Institute found that only 30 percent of Americans have saved more than $1,000 for retirement.
However, declining health with age is an unavoidable aspect of life. According to the CDC, three out of every four Americans over the age of 65 have multiple chronic conditions—defined as illnesses or medical conditions lasting a year or longer requiring ongoing medical attention or limiting daily activities.
Furthermore, the Alzheimer’s Association reports that one out of every three seniors dies with Alzheimer’s disease or another form of dementia. What makes these health issues particularly challenging is their potential to devastate a retirement budget, as managing chronic health conditions or dementia can incur substantial expenses.
What about Medicare?
What’s particularly alarming about Fidelity’s estimate of $280,000 for retirement medical costs is that it’s based on a 65-year-old couple, making them eligible for Medicare. In fact, Medicare premiums account for 35 percent of Fidelity’s calculation, totaling $98,000. (The remainder breaks down to 45 percent for co-payments, coinsurance, and deductibles, and 20 percent for prescription drugs.)
The reality is that Medicare costs more than many realize and covers less than expected. It’s crucial to grasp what Medicare includes and excludes.
Medicare Part A
Also known as hospital insurance, Medicare Part A typically doesn’t charge a monthly premium for most enrollees. However, its coverage is limited. Named hospital insurance for a reason, it only partially covers inpatient hospital care, inpatient care in a skilled nursing facility, home health care, and hospice care. Essentially, Medicare Part A kicks in for serious medical issues that land you in the hospital or are terminal. It doesn’t cover routine doctor visits or prescriptions.
Moreover, Part A only partially covers these services. You still need to meet a deductible of $1,340 (for 2018) for each benefit period, and you’re responsible for coinsurance amounts of $335 per day if hospitalized for more than 60 days, and $167.50 per day for stays exceeding 20 days in a skilled nursing facility.
Medicare Part B
This functions like regular health insurance. Most beneficiaries pay a monthly premium (which can be deducted from their monthly Social Security check). As of 2018, the monthly premium for most Medicare Part B beneficiaries is $134, although higher-income beneficiaries may pay more.
Under Part B, you cover all costs for covered services up to the yearly $183 deductible. Once met, you generally pay 20 percent of the Medicare-approved amount for most doctor services, outpatient therapy, and durable medical equipment. However, Medicare Part B excludes coverage for long-term care, prescription drugs, routine dental or eye care, dentures, hearing aids or exams for fitting them, and routine foot care.
These coverage gaps contribute to the substantial figure Fidelity calculates for retirement health care needs.
Why panic isn’t necessary
While this information may not be uplifting, it’s no cause for rash decisions like bank robbery or gambling. Several prudent strategies exist to ensure health care costs don’t overwhelm your retirement budget.
- Prioritize your health
Though it might not seem directly tied to finances, adequate sleep, exercise, and healthy eating can offer greater returns than traditional investments. Maintaining good health may reduce the need for medical care as you age.
However, even the healthiest individuals aren’t immune to health issues. Nevertheless, investing in your well-being is worthwhile as it enhances your quality of life.
- Explore long-term care insurance
A significant gap in Medicare coverage is long-term care, which aids with daily activities like bathing, dressing, eating, and mobility. Since private health insurance also excludes this, retirees requiring such care must cover it themselves. According to the Department of Health and Human Services, the average 65-year-old today has a 70 percent chance of needing long-term care eventually.
Long-term care insurance can bridge this gap. It helps pay for nonmedical long-term care after a waiting period (lasting 20 to 120 days). Until then, you pay out of pocket.
However, long-term care insurance comes at a cost. While prices vary, a 60-year-old couple might pay between $2,700 and $5,600 annually for a policy covering $150 per day in care for three years.
This insurance is suitable for around 20 to 30 percent of retirees, according to the Center for Retirement Research at Boston College—those with moderate savings. Others may opt to spend down their assets to qualify for Medicaid, which covers long-term care.
- Consider a health savings account (HSA)
If you’re healthy approaching retirement, consider an HSA. Functioning like an IRA, it allows tax-free contributions up to $6,900 for families (as of 2018) and $3,450 for individuals. Those over 55 can contribute an extra $1,000. The funds grow tax-deferred, and withdrawals for qualified medical expenses are untaxed.
However, HSAs require a high-deductible health insurance policy. While beneficial for those in good health, they pose challenges if illness strikes before Medicare eligibility, potentially depleting HSA funds.
- Utilize a Roth IRA for health care savings
Roth IRAs are tax-advantaged investment vehicles allowing contributions of up to $5,500 annually ($1,000 extra for those over 50). After five years and age 59½, withdrawals are tax-free.
This makes Roth IRAs suitable for earmarking health care funds in retirement. With no penalties or taxes on withdrawals, you can use them for medical expenses without tax implications.
Tailor your Roth IRA’s asset allocation based on health expectations. For good health, focus on growth-oriented stocks. If health issues exist, allocate more to stable investments.
In summary, retirement health care costs needn’t overwhelm your budget. By understanding potential expenses and Medicare’s limitations, you can prepare for your medical needs as you age.
