Are You Prepared for Health Care Costs While in Retirement?

There is a simple and unsettling reality in the United States. Many Americans don’t feel financially prepared for health care costs in retirement. In a recent study of U.S. adults ages 50 to 64, nearly 45% had low confidence in their ability to afford health insurance during retirement. We’ve all heard these costs are rising faster than inflation, but how do we plan for something that feels so uncertain?

So, how much is health care likely to cost during retirement? The average 65-year-old couple in 2020 will need $295,000 in today’s dollars during their retirement, excluding long-term care, to cover health care expenses, according to Fidelity. But depending on your age, income, health, location and Medicare eligibility, that number could be much different. When long-term care is factored in, the expense for health care can increase considerably. According to the U.S. Department of Health and Human Services, a person turning 65 today has almost a 70% chance of needing long-term care services in their remaining years. Currently, the national average median cost is $8,821 for a private room in a nursing facility and $4,576 for a home health aide, according to the Genworth Cost of Care survey.

While these high figures may seem alarming, it is not all doom and gloom and there are some ways to proactively prepare for the costs of health care while in retirement. So, what can you do if your retirement and health care savings need a shot in the arm?

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Save in a tax-free account for health care expenses

One great way to begin budgeting for your health expenses is by contributing to a Health Savings Account (HSA). If you currently have a high-deductible health care plan, your employer may offer an HSA. This type of account allows you to contribute while receiving a tax deduction, the money can get invested and grows tax-deferred, and if the money is eventually used for qualified medical expenses the withdrawal is tax-free. In 2021 the IRS allows individuals to contribute $3,600 and families to contribute $7,200.

Over several years this contribution can add up to a significant sum, which can be a ready source of health care funds when needed.

Prepare for long-term care

Even sound retirement plans can be disrupted by rising health care costs and catastrophic illness. Medicare Part A covers skilled nursing care for a specific period after hospitalization. It does not pay for custodial care for Alzheimer’s or other cognitive illnesses. This is why many people protect themselves with a long-term care (LTC) insurance policy. The benefits of LTC insurance go beyond what your health insurance may cover by reimbursing you for services needed to help you maintain your lifestyle if age, injury, illness or a cognitive impairment makes it challenging for you to take care of yourself.

By planning with long-term care insurance, you can prevent your retirement and savings from being devastated if this type of care is needed in the future. In addition, by owning an LTC insurance policy, you provide your loved ones with greater options for providing care while relieving them from full-time caregiver responsibilities.

Where you live makes a difference

Another factor that will have a big impact on how much you spend on health care is where you are living while you are retired. Traditional Medicare coverage is the same all over, but prescription coverage (Part D), Medicare Advantage (Part C), "Medigap" supplemental plans and private insurance vary depending on where you live. The costs of long-term care can vary by thousands of dollars depending on the state you live in. If you are currently living in a state where health care costs are higher, you can consider moving somewhere different while in retirement.

Consider your age when you retire

While you are eligible to begin collecting Social Security at age 62 you are not able to begin Medicare until age 65. If you choose to retire earlier than 65 there are some options that you can explore for health insurance. When you retire, you may choose to continue your employer's coverage under COBRA for up to 18 months. However, your premiums will increase significantly since you will now be paying the full premium yourself. If your spouse is still working and eligible for health insurance, you may be able to move to their plan relatively easily. Another option is buying an Affordable Care Act plan on a federal or state health insurance marketplace. You may also qualify for a subsidy if your household income is below a certain level.

It is relatively unsurprising to learn people who are most confident about retiring have spoken with a professional financial adviser about retirement planning. Will you be able to retire comfortably? The answer can be equally complicated. It is a complicated question. Financial planning is not a static activity. Retirement goals, income needs and projected expenses may change significantly over a lifetime. As a result, it is important to review retirement plans often and revise as needed.

The good news is that whatever your health care costs end up being, those costs will usually be over the course of several years. This gives someone with a well-developed plan the ability to feel confident and prepared for what’s ahead.