How we fund our healthcare expenses in retirement is so important – it’s one of the biggest financial decisions we’ll make, so it should be made with education and guidance.

Many people spend their working lives with health insurance secured through their employers. For those to whom this applies, this arrangement means there is no need to explore health insurance options in the marketplace or negotiate individual plans. Typically, employees are given the choice of one, two, or possibly three employer-sponsored plans to choose from. This is relevant because once a person enters retirement and moves into the realm of Medicare and other health insurance options, there are numerous plans and carriers to navigate. This prospect can seem daunting to the underprepared.

And make no mistake – any decisions made regarding the funding of healthcare expenses will have a significant financial impact, and it’s possible that retirees can vastly underestimate how much money they will need to pay for healthcare in retirement.

The numbers are substantial. According to a 2019 report from Fidelity, an average 65-year-old couple will spend more than $285,000 dollars over the course of their retirement on healthcare, and this doesn’t include additional expenses, such as dental and vision services, over-the-counter medications, foot care, hearing care, and nursing home or long-term care. Most retirees will spend more on healthcare than any other single expense, and the costs are expected to only increase over time.

One reason why retirees may underestimate their healthcare expenses is because they assume that most of their healthcare costs will be covered by Medicare. However, this is unfortunately not the case. While Medicare can be beneficial, it’s important to educate yourself on what Medicare covers. Medicare Part A is free and covers hospital visits, but insurance premiums for Medicare Part B (doctor services and outpatient care) have to be paid out of pocket. There are also premiums, copays, and deductibles which have to be met for Medicare Part D (which covers the cost of prescription drugs).

Managing your healthcare costs in retirement

So, what can you do to help manage your healthcare costs in retirement? Fortunately, there are constructive steps you can take that may help support the funding of your healthcare expenses.

Establish a healthcare investment account

You may wish to establish a dedicated investment account – separate from your other retirement accounts – to specifically save and invest for expected healthcare costs. An individual retirement account can be used for this purpose. The theory is that earmarking money with a specific intention makes it more likely that your goals will be successfully achieved.

Establish a health savings account

Alternatively, if you have a high-deductible health insurance plan (which is defined for 2023 as a plan that has a deductible of at least $1,500 per year for an individual or $3,000 for a family), you can open a health savings account (HSA). There are several tax advantages when establishing an HSA. Any contributions made to an HSA are tax-free (though there’s a 2023 limit of $3,850 for individuals and $7,750 for families). Also, the earnings grow tax-free, and, if the funds are used for qualifying medical expenses, then the entire distribution is non-taxable to the IRS.

Acquire long-term care insurance

Acquiring long-term care insurance is an essential component to defray healthcare costs in retirement. According to the U.S. Department of Health and Human Services, more than 50% of people who are 65 or older today will need long-term care at some point in the future, and a traditional long-term-care insurance policy helps to cover nursing home, assisted living, or home care expenses.

Protect your health

Whenever beginning a journey of health, you should always consult your doctor regarding your individual health needs. One way to save on healthcare costs, though, is to be more active and physically fit, to eat more nutritiously, and to avoid unhealthy habits (like smoking cigarettes or an overindulgence in alcohol). In addition to feeling better and being more productive, there are financial benefits too. According to the Kaiser Family Foundation, a person in poor health spends an average of about $1,700 a year more on out-of-pocket medical expenses than someone in good health. Also, spending less on medical expenses allows you to spend more money on those activities that make your retirement more enjoyable.

Navigating the Medicare maze

As one plans for and approaches retirement, there are serious and consequential questions that need to be asked and answered:

  • When should I retire?
  • Should I start receiving my Social Security income as soon as possible?
  • When should I sign up for Medicare?
  • When should I buy long-term care insurance?

These are important decisions to make, and it is always advisable to seek the professional counsel of a financial advisor to effectively plan for these milestone events. Obviously, there are many challenges that retirees face in order to adequately meet their healthcare costs in retirement. But, by receiving the best possible financial planning advice from professional experts, they will be able to enter into retirement with the security and confidence they deserve.

This commentary contained herein is intended for informational purposes only and should not be construed as tax, legal or investment advice. Past performance is not indicative of future results. Clients should obtain their own tax, legal or investment advice based on their circumstances. The material is based on sources deemed reliable but is not guaranteed.

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