Five Smart Moves for Retirement Health Care: Maximize Your HSA and Medigap Savings

Retirement planning has as much to do with amassing and spending your nest egg as it does with determining your health care needs.

Nobody wants to think about getting ill or injured when they get old, but it’s inevitable for many. How inevitable?

Roughly 70% of Americans age 65 and older will require long-term care at least once in their lifetime, according to the U.S. Department of Health and Human Services. That encompasses everything from a nursing home to in-home care. The amount of care a person needs depends on their unique circumstances, but either way, it isn't cheap.

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A semi-private room in a nursing home, on average, costs $9,277 per month, while a private room is $10,646 a month, according to Genworth’s 2024 Cost of Care survey. A home health aide will cost you $6,483 per month.

Even if you are in perfect health during retirement, it can be expensive. Fidelity Investments estimates that a 65-year-old retiring this year will spend $172,500 in health care. That’s up 4% from $165,000 in 2024. Back in 2002, the first year Fidelity put out an annual estimate, the cost was a mere $80,000. That doesn't account for any unforeseen illnesses or injuries that may require additional care.

“Health is wealth,” says Nilay Gandhi, a senior wealth advisor at Vanguard. “Without health, there’s not much anyone can do, regardless of how much wealth they have. Health care expenses are one piece of the puzzle for retirees and preretirees.”

1. Decide what kind of healthcare you want in retirement

To prepare for health costs in retirement, Gandhi encourages investors and their financial planners to follow a multi-step process that begins with determining the type of care you want and how much you can afford.

If you need round-the-clock assistance, do you prefer it at home or within a facility? If you get injured or ill, do you want insurance to cover the cost of care, or do you want to pay for it out of savings?

Once you decide the type of care, create the necessary documents to ensure your wishes are met if you are ever incapacitated and can’t make your own decisions.

Some of those documents include a last will, a financial power of attorney, and an advance healthcare directive or living will.

After that, it's time to figure out how you’ll pay for it. You have options. Insurance is one; using your savings is another.

2. Know what Medicare does and doesn't cover

Any health planning for retirement should first factor in Medicare, which kicks in at age 65. Most retirees will have to choose between original Medicare or Medicare Advantage, which will have a direct impact on health expenditures.

Original Medicare tends to have what Vanguard says are substantial deductibles, as well as coinsurance. Plus, there is no limit on what out-of-pocket costs you may be on the hook for. Since Medicare doesn't cover dental, vision and hearing exams, you'll need a supplemental Medigap insurance plan.

A Medigap insurance plan is health insurance that private companies sell to help cover some of the costs that an original Medicare plan does not cover.

Another option is a Medicare Advantage Plan, which is sold by a select group of private insurers and replaces original Medicare coverage. These plans tend to have lower costs and more benefits, but the doctors within the network can be limited.

"If cost is the primary concern, Medicare Advantage will usually lead to lower health care costs over time (though it may be more expensive in specific years in which you experience poor health outcomes)," according to Vanguard. "Original Medicare with a supplement will tend to provide a more flexible choice of health providers and more predictable costs, regardless of your health status in any particular year."

3. Decide when insurance makes sense

Long-term care insurance is a popular choice because it makes it easy. You pay a monthly premium, and if you ever get sick or ill, your insurance covers it. You get peace of mind, but there’s a catch.

Depending on your age and health, it can be pricey, ranging from $100 and up per month. The older you are, the higher the monthly premiums.

There are also limitations on what it covers. For it to kick in, you need to be considered chronically ill, unable to perform at least two activities of daily living (ADLs) without assistance, or experiencing cognitive decline and requiring supervision.

Something to keep in mind: while prices are supposed to be the same over time, it is not uncommon for premiums to jump.

Long-term care insurance has its perks
There are tax benefits with LTC insurance. For one, the benefit payout amounts aren’t taxed. Plus, some premiums are deductible as a medical expense if they contribute to medical expenses exceeding 7.5% of your adjusted gross income. As you get older, the deductible amount of the premiums increases.

You can purchase traditional LTC insurance or Hybrid LTC insurance. With the latter, the LTC benefit is part of a life insurance policy or annuity. The benefit is always paid, and premiums are guaranteed. If the LTC insurance coverage is not used, it is transferred as a death benefit or cash value if it is an annuity.

It's also more expensive, easily over $1,000 per month, depending on the bells and whistles.

According to Vanguard, you would benefit from LTC insurance if:

-You can afford the premiums.

- Your family or trusted friends can handle the paperwork and claims process for you.

- You crave peace of mind that comes with insurance.

-You are healthy enough to meet underwriting guidelines.

4. Determine if sharing the costs is a better option than insurance

If you are healthy, your family history is void of any chronic or debilitating illnesses or diseases and you’ve saved for your retirement, long-term care insurance may not be the best option.

Alternatively, you can share in the costs beyond what Medicare covers out of pocket. There are a few ways to do that, including an annuity and a Health Savings Account.

With an annuity, you pay an upfront lump sum and, in return, get a lifetime of regular payments which you can use for medical expenses.

How much the annuity costs depends on your life expectancy, whether or not you have inflation protection, and whether there is a guaranteed minimum payment amount. You can purchase an annuity to begin paying out right away or defer payments for a future date.

Qualified longevity annuity contracts (QLACs) are annuities that are purchased with money from an IRA or 401(k). These vehicles lower your required minimum distribution balances, which can help defer taxes when you have to take RMDs.

5. Max out a health savings account

Many people view a Health Savings Account, or HSA, as a means of saving for healthcare expenses in the present, rather than the future.

But an HSA can be a tax-advantaged way to save for future medical needs. After all, with an HSA, the money you invest can roll over year after year. There is no use-it–or-lose-it rule attached to an HSA.

Plus, HSAs are triple tax-free. You get a deduction when you contribute, they grow tax-free, and you don’t pay taxes when you withdraw them for qualifying medical expenses.

There are limitations. For 2025, the limit is $4,300 for self-only coverage and $8,550 for family coverage. If you are 55 or older, you can contribute an additional $1,000. An HSA is only available with a high deductible health plan. For 2026, it's $4,400 for self-only coverage and $8,750 for family coverage. The step-up contribution remains an additional $1,000.

“You can invest it and let it grow so you are prepared for your healthcare needs,” says Scott Cutler, CEO of HealthEquity.

Don’t wait until it's too late

Declining health may not be avoidable, but it doesn’t have to leave you destitute or a burden to your loved ones. A little planning now can go a long way later.

If insurance is the route you're going, the younger you are when you take out a policy, the cheaper it is. If you plan to use investment options or savings, the sooner you start planning, the better off you'll be.

“Everyone should have a health care plan regardless of age,” says Gandhi. “A long-term plan boils down to does somebody want to inherit that risk, want to share that risk or transfer the risk completely?”

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