How You Can Tackle Health Care Costs in Retirement

Adequately planning for retirement is becoming a growing concern for Americans, and many worry they’ll have to be millionaires before they can stop working.

A recent study from Northwestern Mutual found that adults across the U.S. believe they will need $1.46 million to retire comfortably. That’s a 53% increase compared to the $951,000 many believed they would need back in 2020.

Unfortunately, the amount Americans actually have saved is dropping. According to the same study, the average American had $89,300 saved in 2023. That number has dropped to $88,400 in 2024. So what does this mean when it comes to long-term health care costs, and what can you do now to avoid financial stress in your golden years?

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Before you can formulate a plan to attack health care costs in retirement, it’s important to understand the federal programs in place and how much coverage they provide.

Federal programs and their coverage

Once you turn 65, you become eligible for Medicare. Medicare is a federal insurance program that is meant to help offset health care costs in retirement. Part A covers in-patient hospital stays, hospice care and some home health care. Part B covers certain doctor’s visits, outpatient care, medical supplies and preventive services. Part D helps cover the cost of prescription drugs. Although there are many parts to Medicare, it doesn’t cover everything — forcing some people to enroll in supplemental insurance programs known as Medigap plans. However, the plans may only cover a certain amount depending on how much money you have saved.

The Employee Benefit Research Institute found a 65-year-old man enrolled in a Medigap plan with average premiums will need to have $106,000 saved just to have a 50% chance of having enough to cover premiums and average prescription drug costs. That number jumps to $128,000 for women. This difference in cost is likely due to the fact that women tend to live longer than men. To have a 90% chance of covering health care costs in retirement, the average man will need $184,000 in savings; women will need $217,000. According to the CDC, the average life expectancy for women is 79; for men, it’s 73.

Based on these findings, it’s safe to say health care costs will take a decent chunk from your retirement fund — but don’t let these numbers paralyze you. There are small steps you can take now to help you become more financially secure in retirement.

1. Maintain a healthy lifestyle.

It's obvious advice, but it bears repeating. If you make an effort to stay active and eat healthy, you'll likely spend less on health care than someone who ignores diet and exercise and has other unhealthy habits such as smoking.

2. Boost your retirement savings.

Generally speaking, the sooner you start saving for retirement, the better off you’ll be. If possible, increase or max out contributions to your employee savings plan.

The IRS also allows adults over the age of 50 to make annual catch-up contributions to certain accounts:

• 401(k). You can contribute an extra $6,000 each year.
• 403(b). Employees with at least 15 years of service can contribute up to $6,000 annually.
• IRA. For either a traditional IRA or Roth IRA, you can contribute up to $1,000 more each year.

3. Open a health savings account (HSA).

If your employer offers a health plan that is HSA-eligible, consider enrolling. As part of the plan, you can contribute to a health savings account (HSA) without a tax penalty. Your contributions are made pre-tax. As a bonus, your savings grow tax-free, and you can withdraw money tax-free as long as it is used for qualified medical expenses.

4. Consider your retirement age.

The average age of retirement is 62 for most Americans. While three extra years of retirement may sound good, there are some serious drawbacks. During those three years, you won't be able to contribute to employee-sponsored savings plans. You won't have a steady income. You also won't be eligible to enroll in Medicare until you are 65. That means you’ll be paying out of pocket for health insurance for three years.

5. Live like you are already retired.

An easy way to boost your savings is to cut back on your spending. Start by envisioning your retirement and look for costs to cut. If that vision involves downsizing your home or cooking healthy meals at home, begin making those changes now. Limit the career clothing you buy. Consider purchasing a more economical car. These changes will save you money right away. They will also make the transition into retirement easier.

Unfortunately, doctor visits and medication costs aren’t the only health care expenses you’ll need to account for. Another major factor you’ll need to consider is where you’re going to live as you age — especially if you become cognitively impaired. Data from Genworth found that in 2023 Americans could spend up to $75,504 annually for in-home care, $64,200 for assisted living care and up to $116,800 for nursing home care. Those costs alone could eat through your retirement savings in just a few years. Fortunately, there are several long-term insurance plans that can help offset these costs.

Here are some common plans:

Long-term care insurance. This type of insurance is specifically designed to cover the costs of long-term care services. Policyholders pay premiums in exchange for coverage, which can help cover home care, assisted living or nursing home care expenses.

Hybrid life insurance with long-term care rider. Some life insurance policies offer a long-term care rider, allowing policyholders to access a portion of the death benefit to cover long-term care expenses if needed. These policies provide both life insurance coverage and long-term care benefits.

Annuities with long-term care benefits. Certain annuity products include long-term care benefits that can help cover expenses if the annuitant requires long-term care. Annuities with long-term care riders may offer a lump-sum payment or monthly benefit to cover care costs.

Medicaid. Medicaid is a joint federal and state program that provides health coverage to eligible low-income individuals, including coverage for long-term care services. Eligibility criteria vary by state, but typically income and asset requirements must be met to qualify.

Employer-sponsored plans. Some employers offer long-term care insurance as part of their benefits package. These plans may provide coverage for employees and their eligible family members at group rates.

Accounting for long-term health care is a crucial part of retirement planning. There are a number of steps you can take to help grow your savings now, and there are some insurance options for covering long-term care expenses.

As you’re planning, consider your current health status, cost of care, health insurance coverage, financial resources, family support and personal preferences. Taking these factors into account can help you make an informed decision that best suits your needs.

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