Best Ways to Plan and Pay for Your Health Care Costs in Retirement

health care costs in retirement

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Health care in retirement is like having a baby. It comes with an obvious cost aspect which is often notoriously difficult to estimate. Far too many Americans assume that Medicare is sufficient to cover their expenses, while others consider it unhelpful. Neither of these is true.

A report by the National Bureau of Economic Research revealed that each American retiree spends an average of $ 122,000, in health care costs between age 70 and the time they die. One in twenty spend in excess of $ 300,000 and a few (about one in every one hundred retirees) spend over $ 600,000.

Moreover, if you are married the costs are higher. An investigation by Fidelity Investments revealed that a healthy retiring couple could spend about $ 275,000 on health care costs. This amount could exceed the $ 275,000 because Fidelity’s investigations did not include costs like eye care, hearing aids, dental care and the possibility of long-term care.

Bet you didn’t think you’d spend that much on healthcare costs.

But that’s not all. The shocking part is that most of these payments are out-of-pocket and they are rising by the year.

Now, that’s cause for concern especially if you’re struggling to build a retirement nest egg.

Your worries about how to cover your medical costs in retirement are well-founded.

If you want a worry-free retirement, look beyond the holiday brochures and building a nest egg through your 401(k) only.  Take a critical look at your significant post-retirement costs and see how you can prevent these costs from depleting your assets rapidly.

As Abe Lincoln once said, the best way to predict the future is to plan it. So, know where the heavy expenditure could stem from, and what influences the costs. Then start planning to mitigate the effect of your retirement costs, including the health care costs in retirement.

You can hedge against these costs, make smart insurance choices or increase your savings.

Let’s see how you can plan to cover your health care costs in retirement.

First Define What Constitutes Health Care Costs in Retirement

For many, healthcare costs are synonymous with medical expenses. However, this is no so. Medical expenses are but just one of the items in health care costs. Other expenses such as the cost of drugs, dental care, eye care as well as specialized treatments are included in the health care costs.

Many people experience challenges when paying for health care costs in retirement because retirement also marks a transition from subsidized health care to self-sustained health insurance.

In fact, a report by Henry J Kaiser Family Foundation revealed that employers contribute up to 80 percent of their employees’ health insurance premiums.

When you retire, these subsidies go away and the full weight of the cost of medical insurance premiums falls squarely on you. Worse still, if you retire before age 65, you’ll not be eligible for Medicare, compounding the sorrows of early retirement (at least until you hit 65).

Medicare is an important cover. Retirees who are above 65 are eligible for Medicare. It covers the basics and significantly reduces your costs even though you will still incur substantial deductibles and co-payments. It only makes sense that to fulfill your plan; you’ll need to know how Medicare works.

Second, Understand How Medicare Works.

Medicare is a basic cover which doesn’t cover everything you may desire. However, there’s no reason why not to use it. Of course, your previous insurer covered the latest drug treatments or the most modern technology or personalized care, but Medicare won’t cover that. Also, Medicare doesn’t cover long-term health care at all. So, what you may think is a cost associated with an illness may not fall under what is covered under Medicare.

Medicare has three parts

Part A (Hospital Insurance) which has no premium, but there is a $1,340 deductible as of this year and co-payments of $ 335 / day for hospital stays over 60 days. The co-payment amount increases to $ 670 / day if the stay goes beyond 90 days.

Part B (Medical insurance) which has some a premium of $ 134 per month that depends on income and tax filing status, an annual deductible amount and 20 percent coinsurance responsibility to the patient.

Part C and D (Prescription drug insurance) also have a monthly premium which depends on your plan and income. It also comes along with deductibles and copayments.

Some of the Medicare Rules

We’ve already mentioned that Medicare is a basic cover. It may not cover therapy using the latest developments in drugs or state-of-the-art medical technology and personalized care. Even Medicare part C and D vary in terms of the drugs covered and the permissible portion of the cost which they can assume.

Specialized treatments such as the use of biologics, which are increasingly becoming popular with retirees, can lead to significant surges in costs, are also not covered.

Moreover, Medicare also puts a cap on the amount of diagnostic testing it covers. For instance, it limits PET-CT scans to four in a lifetime, a limit physicians describe as too low especially for seniors facing conditions like metastatic breast cancer.

Lastly, Medicare does not cover modern cataract surgery procedure despite its popularity amongst retirees. However, it covers the old scalpel procedures. The same goes for dental care. Medicare will not pay for dental procedures but if you need to stay at the hospital, Medicare would cover.

With so many stop signs in Medicare, you just have to be smart about insurance as you plan for your health care costs in retirement.

Make Smart Choices about Insurance

You can combine Medicare and supplemental insurance and convert the notoriously difficult to estimate and unpredictable health care costs into predictable, regular monthly premium payments.

Since Medicare has significant deduction and co-payments which could amount to thousands of dollars each year, you can supplement it by purchasing insurance policies such as a “Medigap Policy” or Medicare Advantage Policy.

A “Medigap Policy” covers costs that Medicare doesn’t cover such as co-payments and deductibles. However, it also does not cover areas such as prescription drugs, eye care or dental care.

A Medicare Advantage Policy, on the other hand, also known as Medicare Part C, is offered by private insurance companies. Many such plans include prescription drugs, dental care, hearing aids, eye care, and wellness programs in addition to the benefits included in Medicare Part A and Part B. It typically combines and covers all your inpatient care needs, outpatient care needs and the cost of prescription drugs. You can check out Health Plans America for a quote that’ll fit your budget.

But insurance still leaves you with potential out-of-pocket health costs which could destabilize you in your retirement. Here’s what you can do

Start Hedging Against the High Cost of Health Care

You can take steps to build a financial margin and safeguard your retirement funds against heightening healthcare costs in retirement. You can either work longer – to build a larger nest egg – or reduce your need to dip into the retirement savings.

When you delay filing for Social Security it will have a major boost on the size of the eventual retirement benefit. Analysts have it that if you delay up until you are 70 (the latest age that you can file) you could end up with a nest egg that’s 75% larger than what it was if you would have filed for Social Security at 62 (the youngest age you can file).

Also, you can reduce the need to dip into the retirement savings after you’ve filed for Social Security either by downsizing or find creative ways to continue earning even in retirement. Alternatively, you can look for lower cost options when it comes to your medical needs and save costs significantly. For instance, an MRI prior to a knee replacement surgery can cost $300 at a stand-alone imaging center, compared to a whopping $3,000 at a full hospital. You can find more inspiring healthy tips on Money Saving Mom.com

But there’s only so much you do to hedge against healthcare costs in retirement.

Save for Health Care Costs in Retirement

One way you can protect your retirement nest egg from the aggravations of medical costs is to start early and save for medical expenses with a Health Savings Account (HSA).

Contributing to an HSA has a triple tax advantage in that, whenever you make such savings, they are deductible from your taxable income, the investment earnings are not liable to taxation and amounts withdrawn from the HSA are not included in your taxable income.

However, HSAs have a few caveats. First, they must be coupled with a high-deductible health plan. Thus you could incur higher medical costs during the year’s you are contributing. Secondly, they are capped to a maximum contribution of $ 3,400 for an individual and $ 6,750 for a family per year. Only when you are over 55 can you add an extra $ 1,000 to your yearly contributions. Therefore, it’s best to get started as early as possible to take advantage of the compounding and tax breaks as much as possible.

Lastly, Plan for the Possibility of Long-term Care

Long-term care expenses could quickly drain your retirement savings even if you’ve piled up substantial savings in your 401 (k), IRA or HSA.

But you can contain this peril by purchasing long-term care insurance, creating and maintaining a separate investment account specifically for long-term care or converting your assets into hybrid portfolios that can pay for long-term care.

The bottom line is that you need to come up with a resilient plan that covers all your health care costs in retirement and these strategies will help you to achieve that objective.

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