5 Ways to Plan Ahead for Rising Health Care Costs

The latest numbers are sobering: The average couple retiring at 65 will need $275,000 to cover medical expenses through retirement. If you're not confident you're prepared, here's where to start.

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Woe to the Baby Boomers.

As they near and reach retirement, many Boomers are growing increasingly worried that unexpected and rising costs will keep them from attaining their financial goals.

That includes the high cost of health care, which is predicted to continue outpacing overall inflation in the U.S., as well as Social Security’s annual cost of living adjustments.

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Given that the average Baby Boomer can expect to live well into his or her 80s — or longer — that’s a real concern. The Society of Actuaries says one-third of married-couple households will have at least one spouse live to age 92. And as we get older and frailer, the costs for care will likely increase, as we’ll need more prescription medications, vision and dental care, doctor visits and, potentially, hospital stays.

According to a 2017 Fidelity report, the average couple retiring at age 65 will need $275,000 to cover their medical expenses through retirement. That’s 6% higher than last year’s estimate, and it doesn’t include some high-ticket items, such as dental or custodial care.

This makes covering health care costs a crucial piece of any retirement plan.

As with all things related to retirement, you’ll fare better if you prepare for those costs now than if you wait until they’re eating away at your nest egg. Here are some things to consider going forward:

1. Be aware of what your costs could be.

AARP has a great online cost calculator. You can plug in information for you and your spouse, and the calculator will factor in your age, specific conditions you have that could add to your health care bills and more. It will even estimate the percentage that Medicare will pay and how much may come from you.

2. Look at how various Medicare supplement plans can help cover the costs that Medicare doesn’t.

Be sure of what you’re getting and what your deductible and out-of-pocket costs will be. This step can be overwhelming, especially when you first sign up, so you may need help determining what’s right for you. A licensed agent can offer assistance, or you can go to your local branch of the National Association of Area Agencies on Aging (www.n4a.org). If you’re retiring before you reach Medicare eligibility at age 65, an agent can help you bridge the gap with a health insurance policy that suits your needs. And check out www.medicare.gov for information about future coverage choices.

3. Think about contributing to a health savings account (HSA).

An HSA is kind of like a personal savings account, except the money is meant to be used specifically to pay for health care expenses. To be eligible to open an HSA, you must have a high-deductible health insurance plan. If you’re healthy now and want to save for future health care expenses tax-free, an HSA may be an appealing choice. If you’re near retirement, an HSA can make sense because the money can be used to offset the costs of care after retirement. (If you withdraw funds for non-medical expenses before you turn 65, you have to pay taxes and a 20% penalty, plus taxes on the withdrawal. After 65, there’s no penalty, but you will still be taxed.) You can’t contribute to an HSA if you’re enrolled in Medicare, but you can draw on funds already in the account. Go to https://www.irs.gov/publications/p969 for more on HSA benefits and limitations.

4. Plan now for long-term costs.

The U.S. Department of Health and Human Services estimates that someone turning age 65 today has almost a 70% chance of needing some type of long-term care services — from assistance with everyday tasks (such as using the bathroom or eating) to supervision due to cognitive impairment. And 20% of today’s 65-year-olds will need it for longer than five years. Medicare is limited in what it will pay for this care, and the costs can quickly plow through a couple’s savings. The Genworth 2017 Cost of Care Survey found the annual median cost of long-term care services increased an average of 4.5% from 2016 to 2017, the second-highest year-over-year increase for nursing home and home care since the study began in 2004 — and nearly three times the 1.7% U.S. rate of inflation.

The cost of adult day health care services went up 2.94% to $70 a day; assisted living facilities went up 3.36% to $123 a day; and private-room nursing home care went up 5.50% to $267 a day. (To see the cost of care in your area, click here.) The cost of long-term care insurance is also rising, leading many to seek out alternative ways to pay the bills, from reverse mortgages to life insurance policies and annuities that offer accelerated benefits. Your financial adviser can go over all your options and should include this very important cost in your comprehensive retirement plan.

5. Keep an eye on your retirement income.

If your income exceeds the designated IRS threshold (currently $170,000 modified adjusted gross income for those who are married and filing jointly), you’ll pay more for your Part B and Medicare prescription drug coverage. The IRS calls this the “income-related monthly adjustment amount.” Your tax attorney and/or financial adviser can help you come up with a tax-efficient plan that can help with this additional cost.

If you’ve been fretting about the damage that rising health care costs could do, talk to your adviser about building some proactive strategies into your long-range retirement plans. If you are not working with someone who discusses these issues and helps plan for them, ask why not; maybe it is time to search for a planner who does.

We all work most of our lives accumulating the wealth we need to enjoy retirement. The more financially prepared you are, the more you’ll be able to enjoy your retirement — now and in the future.

Kim Franke-Folstad contributed to this article.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Michael K. Macke, CFP
Vice president and co-owner, Petros Estate and Retirement Planning

Michael Macke is vice president and co-owner of Petros Estate & Retirement Planning, a company headquartered in Jacksonville, Fla., with offices in St. Augustine and Winter Park.