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5 Strategies for Planning for Health Care Costs in Retirement

September 30th, 2020

Michael Macke, CFP®

As baby boomers continue to reach retirement age, many of them are worried about rising health care costs. In fact, health care is one of the most significant expenses for retirees, and the cost continues to rise.

Given that most boomers can expect to live well into their 80s, how to pay for health care is a genuine concern. As we get older, the cost of care increases, covering everything from prescriptions and doctor visits to insurance premiums and even hospital stays.

According to a 2019 Fidelity report, the average 65-year-old couple will need $285,000 just for medical expenses in their later years. And that’s just for run of the mill health care costs; that figure doesn’t cover things like extended hospital visits or long-term care.

Covering health care costs is a crucial component of any retirement plan. But how you can be sure you have enough to pay for medical expenses in retirement? Here are some things to consider:

Be aware of your potential costs.

Want to get an idea of how much you could pay in health care costs in the future? Try this AARP calculator, where you can plug in information for you and your spouse, including your age, specific conditions you currently have and more. The calculator will even estimate how much Medicare might cover and how much you can expect to pay out of pocket.

Consider Medicare supplement plans.

Medicare can be complicated, and figuring out what it covers, what it doesn’t and how much you’ll end up paying can be a daunting task. We help clients explore their Medicare options and figure out if a Medicare supplement plan might be a good choice for them. We can also put you in touch with a Medicare expert who can help you pick the right supplement plan to cover your needs.

Look at health savings accounts.

A health savings account (HSA) is a special type of savings account, in which the money grows tax-free and is used specifically for health care expenses. You are eligible for a HSA if you have a high-deductible health insurance plan. If you’re nearing retirement, your HAS could be used to offset your medical costs in your later years. Keep in mind that if you withdraw funds for non-medical expenses before you turn 65, you’ll pay taxes and a penalty on the withdrawal. After 65, you won’t pay the penalty but you will pay taxes. And you can’t contribute to an HSA if you’re enrolled in Medicare, but you can use the funds to pay for health care expenses.

Plan for long-term care.

Will you need long-term care assistance in the future? It’s likely – and the best thing to do is plan for it now, before you need it. Medicare limits how much it pays for long-term care, which includes everything from a home health aide to nursing home residency. In 2019, Genworth reported that the average monthly cost of a home health aide was $4,385, while a nursing home stay averaged $8,517 per month – and that number could be much higher depending on where you live.

Along with all other health-related items, the cost of long-term care insurance is also rising. We can help you explore your options to pay for long-term care and put those options in place for when the time comes.

If you’ve been worried about rising health care costs and how they could impact your future, we can help you take proactive steps to protect yourself. The more financially prepared you are now, the more you’ll be able to enjoy retirement.