Incorporating Health Care into Your Retirement Savings Plan

You may believe that planning for retirement revolves around enjoyable aspects such as home renovations, traveling, indulging grandchildren, and savoring life. However, neglecting a crucial aspect of your future—healthcare costs—can be a significant oversight.

Healthcare expenses could emerge as your most substantial expenditure in retirement. Each year, Fidelity determines the projected medical costs for couples aged 65 retiring that year. For example, in 2018, Fidelity estimated that a typical couple would require approximately $280,000 in today’s terms to cover medical expenses during retirement, excluding long-term care needs.

While this figure may be alarming, there’s no reason for despair. Average-income earners can adequately prepare for future healthcare expenses without resorting to drastic measures. Here’s what you need to know regarding healthcare in retirement and some strategies to budget for it. (See also: 4 Affordable Retirement Spots With World-Class Health Care)

Your health in retirement

Let’s begin with the unfortunate reality: Your health may decline in retirement.

Contemplating deteriorating health can be more challenging than thinking about mortality, as we accept the latter is unavoidable. This is evidenced by studies showing that while 42 percent of Americans have established wills or estate plans, only 30 percent have managed to save beyond $1,000 for retirement, according to the Economic Policy Institute.

Declining health is a natural part of aging. According to the CDC, three out of four Americans aged 65 and over contend with multiple chronic conditions, which demand ongoing medical care or restriction of daily activities.

Moreover, the Alzheimer’s Association indicates that one in three seniors will succumb to Alzheimer’s disease or another type of dementia. Such chronic health issues can devastate a retirement budget. (See also: Don’t Let Poor Health Kill Your Retirement Fund)

The Role of Medicare

What’s particularly concerning regarding Fidelity’s $280,000 estimation for medical expenses is that it’s based on couples eligible for Medicare upon retirement at 65. Notably, Medicare premiums represent 35 percent of this estimate, or around $98,000. The remaining costs account for 45 percent of co-payments, coinsurance, and deductibles, with 20 percent attributed to prescription medication.

Medicare can be more expensive than anticipated and covers fewer services than one might expect. It’s essential to grasp what Medicare includes and excludes. (See also: 5 Common Medicare Myths, Debunked)

Medicare Part A

Also known as hospital insurance, Medicare Part A typically incurs no monthly premium for most enrollees. However, its coverage is limited. As hospital insurance, it principally covers inpatient hospital care, care in skilled nursing facilities, home health services, and hospice care for terminal illnesses. Unfortunately, it does not cover routine doctor visits or medications.

Additionally, beneficiaries still face a deductible—$1,340 as of 2018—for each benefit period, and must pay coinsurance of $335 per day for hospital stays exceeding 60 days and $167.50 per day beyond 20 days in a skilled nursing facility. (See also: 4 Common Mistakes to Avoid When You Enroll in Medicare)

Medicare Part B

This segment of Medicare is designed to function like standard health insurance. Most beneficiaries pay a monthly premium, often deducted from their Social Security payments. As of 2018, this premium is $134 for most enrollees, though higher earners may face increased costs.

Under Part B, there are out-of-pocket costs for covered services until the annual deductible of $183 is met. Afterward, beneficiaries typically pay 20 percent of the Medicare-approved amount for most physician services, outpatient therapies, and durable medical equipment. Nevertheless, Medicare Part B does not cover long-term care, routine dental or vision care, hearing aids, or necessary exams for them, nor does it cover day-to-day assistance for the elderly. Such limitations can account for the significant costs predicted by Fidelity for healthcare in retirement. (See also: How to Make Sense of the Different Parts of Medicare)

Why You Shouldn’t Panic

While this information might not be encouraging, it should not incite panic. Several intelligent strategies can ensure that healthcare does not overwhelm your retirement finances.

1. Prioritize your health

Maintaining adequate sleep, regular exercise, and a nutritious diet might not initially seem like financial planning, but they can yield better returns than conventional investments. By taking care of your physical well-being, you can enhance your overall health and potentially reduce future medical needs.

However, it’s crucial to recognize that even the healthiest individuals are not immune to health challenges. Your efforts to maintain good health will benefit you presently and in the future. (See also: 7 Smart Ways to Invest in Your Health)

2. Look into long-term care insurance

A significant gap in Medicare coverage involves long-term care—assistance seniors may require for everyday tasks like bathing, dressing, and eating. Since no private health insurance policies typically include this care, retirees in need must cover costs independently. The Department of Health and Human Services states that a 65-year-old has a 70 percent probability of requiring long-term care at some stage.

Long-term care insurance can bridge this coverage gap. This insurance assists with nonmedical long-term care costs after the “elimination period,” lasting anywhere between 20 and 120 days, during which you bear the costs yourself.

However, this insurance can be pricey. A 60-year-old couple can expect annual premiums ranging from $2,700 to $5,600 for policies that provide $150 per day in care for a three-year benefit period. According to the Center for Retirement Research at Boston College, long-term care insurance may be especially advantageous for around 20 to 30 percent of retirees who have a reasonable nest egg. For others, it might be wiser to spend their assets until qualifying for Medicaid, which covers long-term care. (See also: 5 Ways to Make Long-Term Care More Affordable)

3. Explore health savings accounts

If you are healthy as you near retirement age, consider a health savings account (HSA). This account functions similarly to an IRA, allowing families to contribute up to $6,900 (as of 2018) and individuals up to $3,450 using pre-tax earnings. Those over 55 can contribute an additional $1,000 above these limits. Funds grow tax-deferred, and any withdrawals made for qualified medical expenses remain untaxed.

One disadvantage of HSAs is the requirement for a high-deductible health insurance policy to qualify. For example, an individual’s policy must have a minimum deductible of $1,350, while a family plan requires a $2,700 deductible, with out-of-pocket maximums capped at $6,650 for individuals and $13,300 for families.

This requirement makes HSAs complex choices. They can be excellent options if you maintain good health, as you may also take penalty-free nonmedical withdrawals after turning 65 (subject to tax). Thus, an HSA could become part of your retirement portfolio beyond just healthcare expenses.

On the flip side, high-deductible plans can put you in a challenging situation if a sudden illness strikes before you qualify for Medicare, possibly forcing you to deplete your HSA before retirement. (See also: How an HSA Could Help Your Retirement)

4. Establish a Roth IRA for healthcare savings

Roth IRAs provide tax-advantaged investing options where contributors use after-tax dollars, allowing the account to grow tax-deferred. Provided you maintain the Roth IRA for at least five years and are over 59½, withdrawals are tax-free. As of 2018, the contribution limit is $5,500 annually, with an additional $1,000 allowance for those over 50.

This makes Roth IRAs suitable for earmarking funds specifically for healthcare in retirement. Withdrawals incur no penalties or taxes, mitigating concerns over significant medical expenditure impacting your retirement taxes.

Your asset allocation within a Roth IRA can be tailored to your health outlook. If you enjoy good health nearing retirement, focus on growth-oriented investments. Conversely, if you have chronic health issues or a family history of specific medical concerns, consider reallocating to more stable investments. (See also: The Right Way to Withdraw Money From Your Retirement Accounts During Retirement)

The good, the bad, and the healthy

Healthcare costs in retirement needn’t overburden your finances. By acknowledging potential expenses and recognizing the coverage gaps in Medicare, you can proactively prepare for your medical needs as you age. (See also: Follow These 5 Steps to Full Health Care Coverage in Retirement)

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