Factor This In: Planning for Medical Costs in Retirement

I have created hundreds of retirement projections for clients to help show the path they are on and what their retirement might look like based on spending patterns, income, etc. One of the things that often gets overlooked is health insurance.

Expect your health care costs to increase as you get older, and start planning for it now.

According to a new estimate by Fidelity Investments, a 65-year-old couple retiring in 2022 may need to save an average of $315,000 (after tax) to cover health care and medical expenses during their retirement, a 5% increase from 2021’s estimate. While that number probably feels more than a little unsettling, what’s even more worrisome is that Fidelity also found that most Americans underestimate what their medical costs in retirement will be by a long shot – with expectations close to $41,000. That’s a shortfall of over a quarter million dollars.

Ready for another shocking bit of information? That $315,000 does not include over the counter medications, most dental services, or long-term care. According to long-term care insurer Genworth, a private room in a nursing home in 2020 had a median cost of $105,852.

Whether you’re early on in your working career, approaching retirement, or already transitioning out of the workforce, it’s important to be realistic about what you should expect to pay for medical costs in retirement.

Fitting the Costs of Medical Care Into Your Retirement Budget

At its core, your overall retirement budget depends on two main parts: how much money will be coming in each month and how much money will be going out for all of your expenses. Factoring in your expected costs of health care is critical to ensuring you stay on track to not outlive your savings.

When it comes to expenses in retirement, health care accounts for a significant portion – right up there with housing, food, and transportation. And even after the premiums are paid, Medicare only covers around two-thirds of the cost of projected health care services, with out-of-pocket spending coming in around 12%, according to the Employee Benefit Research Institute (EBRI).

Working with a wealth management team is highly recommended to stay up-to-date on rising costs and expectations for your retirement years. Making adjustments to your plan as needed will make all the difference in the world down the road.

Do You Know What Medicare Covers and Doesn’t Cover?

Original Medicare plans (Parts A and B), do not cover dental or vision care, while Medicare Advantage plans typically will. If you’re planning on relying on Medicare to cover medical costs in retirement, you’ll also need to be prepared to budget for deductibles, premiums, medications, and other out-of-pocket costs (without a Part D prescription drug policy, Medicare does not cover medications). Medicare does not cover long-term care.

For 2022, the standard deductible for Medicare Part A (which covers hospital stays and procedures) is $1,556, while the standard monthly premium for Part B (which covers doctor visits and outpatient treatments) is $170.10 (some Medicare beneficiaries will pay more, depending on their total adjusted gross income). The 2022 Part B annual deductible is $233.

While plan premiums for Part D vary by income, the average 2022 premium for Part D coverage is estimated to be about $33 per month.

Medicare Advantage plans are offered through Medicare-approved private insurers, and generally cover the same costs that original Medicare does, along with Part D prescription drug coverage. Also, some of these plans may also extend coverage to include costs associated with vision, dental, and hearing.

Creating a safety net for health care spending in retirement

An advantage of starting to save early is that you can create a safety net outside of your retirement income for medical costs down the road.

Health Savings Account (HSA)

If you’re not yet enrolled in Medicare, you can take advantage of a health savings account (HSA) to prepare for retirement medical expenses. These are often available with high-deductible health plans (HDHPs), have many uses as well as tax advantages.

• For 2022, the regular HSA contribution limit is $3,650 for individual coverage and $7,300 for family coverage
• Deductible contributions
• Tax-deferred growth
• Tax-free withdrawals for qualified medical expenses
• Can be used to pay for certain medical premiums (including Medicare and long-term care insurance premiums)
• Once you’re enrolled in Medicare, you can no longer make contributions to an HSA

Even if you’re already in your 50s, you can still maximize these plans by taking advantage of catch-up contributions and employer contributions. Individuals 55+ can make a catch-up contribution of $1,000 per year in addition to the maximum contribution limit, and your HSA can be used for preventative screenings such as mammograms or annual physicals covered by your HDHP.

Long-Term Care Insurance

Another way to fill the gap left by Medicare is by purchasing long-term care insurance which can pay a monthly benefit toward long-term care for either a specified amount of time (generally 2-5 years) or for the remainder of your lifetime. While long-term care insurance premiums may not be affordable for everyone, an alternative is buying a life insurance policy that has the option of adding a long-term care insurance rider.

What you can do to prepare for rising medical costs

Staying healthy is always a good plan, but there is a flip side to that coin. What you won’t spend on medical costs is likely going to be needed for a longer life expectancy. Start saving early, use tax-advantaged health savings accounts, know your options, and work with a financial professional to keep you on track for whatever the future holds. Give us a call today or schedule an appointment to talk to an advisor.