Whether you’re nearing the retirement transition or currently retired, there is one crucial detail you don’t want to overlook: healthcare costs. Without proper planning, you might be exposing your retirement plan to an unwelcome surprise. As healthcare costs continually rise, you’ll need to ensure that your retirement plan can adequately address these pressures.
But you might ask yourself: how do I plan for unknown healthcare costs? How can I navigate the complexities of healthcare expenses to preserve my assets and achieve peace of mind?
Working with a financial advisor and developing a financial plan is the first step. In this article, you’ll discover how we guide clients through retirement healthcare planning.
The Reality of Healthcare Costs in Retirement
Healthcare costs continue to rise, presenting challenges for pre-retirees and retirees. In 2020, the average person over the age of 65 spent over $22,000 on healthcare costs.(1) Throughout your retirement, you should expect to pay upwards of $310,000 on average for healthcare.(2) This is an incredible number and it’s only expected to rise as the Centers for Medicare and Medicaid Services predicts healthcare spending to rise 5% in 2024.(3)
Furthermore, healthcare costs can vary based on where you live, your health status, and the type of care required. For example, in 2020, residents in New York paid 37% higher costs ($14,007 per year) than those in Utah ($7,522 per year).(4) Prescription drugs, hospital visits, and long-term care will also affect your healthcare spending throughout your retirement.
Key Factors Influencing Retirement Healthcare Expenses
A few key factors influence your retirement healthcare expenses, including Medicare and supplemental policies, long-term care, and prescription medication.
A. Medicare and Supplemental Policies
Medicare is a vital component of retirement healthcare coverage, but it won’t cover everything. You must have supplemental policies such as Medigap or Medicare Advantage plans to mitigate any out-of-pocket healthcare expenses. Below is a brief breakdown of what Medicare covers:
- Part A (Hospital Insurance) covers hospitalizations and procedures after meeting the deductible, which is $1,632 in 2024.(5)
- Part B (Medical Insurance) covers other services and expenses not covered by Part A, such as physicians’ services, outpatient hospital procedures, some home health services, and some medical equipment. It requires an annual premium of $174.70 as of 2024 with a deductible of $240.70.(6)
- Neither Part A nor B covers prescription medication, so you’ll need Part D.
- Medicare Advantage plans provide all Medicare services but also may cover expenses excluded from Parts A and B, including prescription drugs.
- Medigap is a supplemental policy offered by private insurance companies to cover the expenses not included in Medicare.
B. Long-Term Care Needs
Long-term care is one of the costliest portions of retirement healthcare expenses, and it’s not covered by Medicare. In 2020, the average monthly cost for a room in a nursing home was between $6,800 and $7,700 depending on whether it was semi-private or private.(7) As living costs continually rise due to inflation, so too will long-term care costs.
And, if you think you won’t need long-term care, it’s time to take a hard look at reality. 70% of individuals over the age of 65 will require long-term care in some capacity.(8) So, plan for these costs early to ensure you have enough retirement money saved.
C. Prescription Medications
As you get older, the chances of you needing prescription medication increase. However, Original Medicare (Parts A and B) does not include prescription drug coverage. You’ll need to get Medicare Part D coverage for any prescription medication.
When planning for healthcare expenses, it’s important to consider these key influencing factors. Without accounting for all possibilities, you could find your retirement fund significantly depleted. But this won’t happen to you with the right strategy, which we discuss below.
D. Income Related Monthly Adjustment Amount
IRMAA is a surcharge on top of your Part B and Part D premiums based on your income in retirement. This is a surprising expense that can catch retirees off guard. Here’s a quick snapshot of those costs:
Source: https://www.humana.com/medicare/medicare-resources/irmaa
Strategies to Prepare for Healthcare Costs in Retirement
To remain financially secure during retirement, you need to have the right strategies for the future. Savings and investments as well as additional insurance can help alleviate the financial burden and uncertainties of healthcare in retirement.
A. Savings and Investment Options
Health Savings Accounts (HSA) are particularly powerful tools for healthcare savings. However, once you enroll in Medicare, you can no longer contribute to an HSA. Despite this limitation, you can still use your HSA for expenses even if you have Medicare. So, it’s important to include an HSA in your retirement savings plan well before retiring.
Different from an HSA, an Investment Retirement Account (IRA) and other investment options like a 401k offer other tax-advantaged savings opportunities. Contributions are tax-deductible and grow tax-free. Once you retire, you can start making withdrawals and use these for your healthcare expenses. Distributions for qualified expenses are received tax-free – a triple tax benefit!
B. Insurance Solutions
Like life insurance or disability, long-term care insurance provides a crucial safety net for retirees. Solutions range from traditional pay-as-you-go insurance to permanent life insurance with a long term care insurance rider providing access to death benefit in the event of a qualifying long term care event. Consulting with a financial advisor on different coverage options can help fill any healthcare savings gaps.
C. Retirement Income Planning
Additional savings through tax-preferred vehicles and mitigating costs through insurance specific-solutions certainly help. We believe the most foundational element to proper healthcare planning is a retirement income plan that accurately estimates these costs and positions assets to fund these.
Through careful modeling we can better forecast what healthcare costs could be for your situation. We then apply these anticipated costs along with your lifestyle desires to begin crafting a retirement income strategy flexible and sufficient to meet these needs throughout retirement. Our Four Buckets Retirement Income Strategy™ is designed to accomplish these goals using a simple, visual framework.
How Lohr and Company Can Help
Healthcare is a complex part of retirement planning, but it’s essential to be proactive to ensure financial security and peace of mind. Understanding the nuances of Medicare, exploring insurance solutions, leveraging savings and investments and creating a distribution strategy are all key navigating retirement healthcare costs confidently.
At Lohr and Company, we specialize in comprehensive retirement planning, including healthcare considerations. With each phase of retirement planning, we have one simple goal: to ensure your assets align with your lifestyle considerations, including healthcare. Schedule a consultation with Lohr and Company to start planning for your retirement healthcare needs.
References:
- Centers for Medicare and Medicaid Services, “NHE Fact Sheet”, last modified 12/13/2023.
- Center for Retirement Research at Boston College, “How Much Do Retirees Spend on Uncertain Health Costs?”, last modified 8/30/2022.
- Centers for Medicare and Medicaid Services, “National Health Expenditure Projections 2022-2031: Forecast Summary”, last modified 09/06/2023.
- Centers for Medicare and Medicaid Services, “NHE Fact Sheet”, last modified 12/13/2023.
- Centers for Medicare and Medicaid Services, “2024 Medicare Parts A & B Premiums and Deductibles”, last modified 10/12/2023.
- Centers for Medicare and Medicaid Services, “2024 Medicare Parts A & B Premiums and Deductibles”, last modified 10/12/2023.
- Administration for Community Living, “Costs of Care”, last modified 2/18/2020.
- Administration for Community Living, “How Much Care Will You Need?”, last modified 2/18/2020.
