Saving for Medical Costs in Retirement

May 31, 2021 by First Federal Bank

MedicalSaving enough money to enjoy a full retirement may already feel like an uphill climb before you even consider the rising cost of healthcare. As you get older, you can expect your medical expenses to increase, which can put a damper on your plans without proper consideration. By setting aside funds specifically for your healthcare needs, you can look forward to enjoying your golden years without struggling to make ends meet.

How much is healthcare in retirement?

Healthcare could ultimately prove to be one of your biggest expenses in retirement. Fidelity estimates the average couple retiring in 2020 at the age of 65 can expect to spend $295,000 on associated healthcare costs over their retirement — including premiums, deductibles, and additional coverages. This is up 3.5 percent from the previous year. Needless to say, the cost of healthcare is only expected to rise for future retirees.

How you can start saving now

If you currently have a high-deductible health plan, you’re eligible to start a health savings account. Having an HSA is an incredibly smart choice not just for covering today’s medical expenses, but also for saving up for retirement.

Investigative journalist Rebecca Lake writes for Investopedia that an HSA offers three tax advantages: your contributions are deductible, they grow in a tax-deferred savings account, and any deductions you make for qualified medical expenses are tax-free. These factors alone make an HSA a versatile part of a retirement portfolio.

With proper planning, you could potentially build an HSA that will cover a great deal of your post-retirement medical expenses. Per the Internal Revenue Service, the maximum annual contribution for an HSA is currently $3,600 for individuals and $7,200 for couples. Lake also notes you can take advantage of catch-up contributions (currently up to $1,000 a year) as well as employer contributions if you start an HSA in your 50s.

Once you enroll in Medicare, you can no longer contribute to your HSA. You can, however, let the money you’ve built up sit in the account and continue to accrue interest until you’re ready to use it.

Know what Medicare covers

As you approach the age of 65, Medicare becomes your most viable option for healthcare in retirement. Your options will include Medicare Part A, Part B, Part D, and the Medicare Advantage Plan which covers all three.

For most, Medicare Part A is free, but Part B, Part D, and the Medicare Advantage Plan all include monthly premiums. According to Fidelity, these premiums can make up as much as 40 percent total amount you have saved up for your retirement. But despite this significant cost, Medicare won’t cover all of your needs, which is why pre-retirement budgeting is crucial.

According to Kimberly Lankford, a contributor with U.S. News & World Report Money, a common supplement is a Medigap policy. While Medigap also carries a not-insignificant monthly policy cost, Lankford’s article notes that this can cover large out-of-pocket costs and help mitigate risks over time.

Lankford also points out Medicare doesn’t cover long-term care costs, which can range in the hundreds of thousands of dollars. For this, she recommends considering long-term-care insurance or a hybrid policy that doubles as life insurance. These policies will carry costs, but they can pay off in the long run.

One of the best ways you can prepare for retirement is speaking with a financial advisor. A professional familiar with the costs of retiring can help put you on a path that will ensure your needs are fully met.

Categories: Saving Money, Retirement, Financial Education

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