When thinking about the components that make up a comprehensive financial plan, many people fail to consider healthcare. However, healthcare and medical expenses are among the largest expenses faced by many people, especially retirees. In fact, recent research estimates that a 65-year-old couple retiring in 2024 may need $330,000 in after-tax savings to cover healthcare expenses in retirement.[1]
Whether you are retired or still actively working, healthcare expenses are an important component of your comprehensive financial plan. Fortunately, there are some steps you can take today to help plan for future healthcare costs.
#1 – Take time to understand your medical insurance options.
Your company’s annual benefits enrollment period is a great time to review all your health insurance options to help ensure your plan continues to meet your needs. The most common types of health insurance policies are health maintenance organizations (HMOs), preferred provider organizations (PPOs), point-of-service (POS) plans and exclusive provider organizations (EPOs). The type of plan that makes the most sense for you depends on your family’s specific needs, concerns and medical issues.
- HMOs –HMOs typically require you to visit in-network doctors, except for medical emergencies. They also require a referral from your primary care doctor to see a specialist.
- Pro –Typically lower out-of-pocket expenses than the other types of plans
- Con –Less flexibility to choose providers and visit specialists
- PPOs –PPOs allow a bit more flexibility to visit out-of-network providers; however, it is generally less expensive to use in-network care. Participants in PPOs can visit specialists without a referral.
- Pro – More flexibility to choose providers
- Con – Higher out-of-pocket costs than HMOs
- POS plans – POS plans allow you to visit out-of-network providers, but using in-network care is less expensive. They require a referral to visit a specialist.
- Pro – More provider options and a doctor who helps coordinate care
- Con – Referrals required to see a specialist
- EPOs – EPOs also require you to see an in-network provider, except for medical emergencies. However, they do not typically require a referral to visit a specialist.
- Pro – Lower out-of-pocket costs and no referrals required
- Con – Less flexibility to choose providers
Any of these types of health insurance plans can be considered a high-deductible health plan (HDHP) if they include a minimum deductible that meets the annual limit (at least $1,600 per individual or $3,200 per family in 2024). HDHPs typically offer lower up-front premiums in exchange for higher out-of-pocket costs when care is needed.
#2 – Save in a health savings account (HSA).
One of the best ways to save for medical expenses is by contributing to an HSA. HSAs are an option for those enrolled in HDHPs, whether an HMO, a PPO, a POS plan or an EPO. As noted above, in order to qualify, the plan must have an annual deductible of at least $1,600 per individual or $3,200 per family.
HSAs allow you to make pre-tax contributions to a tax-deferred savings account. Unlike flexible savings accounts (FSAs) that require you use your funds each year or risk forfeiting them, HSAs allow your savings to accumulate over time. Also, because funds within an HSA are not tied to your employer, you can take them with you when you change jobs or retire.
However, the most compelling reason to contribute to an HSA is the tax benefits they provide.
- Tax-free contributions –Contributions to HSAs are made with pre-tax dollars, which lowers your taxable income during the year in which the contributions are made.
- If you participate in an HSA through your employer, contributions are deducted from your paycheck before taxes, similar to the manner in which you contribute to a traditional 401k.
- If you do not have access to an HSA through your employer, you can still contribute and claim a tax deduction when you file your annual tax return.
Note –Similar to other types of pre-tax savings accounts, annual HSA contributions are limited by the IRS. In 2024, individuals can contribute a maximum of $4,150 and families can contribute up to $8,300. Individuals aged 55 and older are eligible to make an additional $1,000 catch-up contribution annually.
- Tax-free growth – Both HSA contributions and earnings grow tax-free within the account. This is a significant advantage over traditional savings accounts that are subject to taxation on earnings.
In addition, unlike other tax-deferred retirement savings vehicles, HSAs are not subject to required minimum distributions (RMDs), which means the assets within the account remain available for your entire lifetime.
- Tax-free withdrawals – In addition to allowing tax-free contributions and tax-free growth, HSAs provide the added benefit of tax-free withdrawals when assets are used to pay for qualified medical expenses.
If you choose to withdraw assets from the account before you reach age 65, and those assets are used for non-medical expenses, the withdrawal may be subject to ordinary income taxes and an additional 20% early withdrawal penalty. Once you reach age 65, you are no longer subject to the 20% early withdrawal penalty; however, assets not used for qualified medical expenses will still be subject to ordinary income tax.
#3 – Consider long-term care insurance.
Another important financial planning consideration is whether it makes sense to purchase a long-term care (LTC) insurance policy. LTC insurance covers the cost of in-home care assistance, nursing home expenses and assisted living facilities.
Some research indicates that an individual who is 65 today has a nearly 70% chance of needing some type of long-term care support in the future.[2] And the cost of long-term care can be incredibly expensive, averaging $6,292 per month for a home health aide, $5,350 per month for an assisted living facility and more than $9,700 per month for a private room in a nursing home.[3]
However, the costs of implementing a LTC insurance policy may outweigh the benefits, especially if you do not end up needing long-term care. Some advisors believe investing in a diversified investment portfolio makes more sense than purchasing an expensive LTC insurance policy. Of course, the decision of whether to purchase LTC insurance depends on many factors, including your current financial situation, goals for the future, age, health history, legacy goals, etc. Your financial advisor can help you decide whether LTC insurance makes sense for you.
Could you use some help incorporating healthcare planning into your overall financial plan? We would love to have a conversation. To learn more about how United Capital Financial Advisors can help you plan for the future, please contact us.
[1] https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
[2] https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
[3] https://www.genworth.com/aging-and-you/finances/cost-of-care
