Planning for Medical Costs in Retirement? How to stack the deck in your favor

Posted by Kerry Hannon.
Close your eyes, throw a dart, and make a wish you hit the bull’s eye. That’s what planning for health care expenses in retirement can feel like - a shot in the dark
The cost of future out-of-pocket heath care is tricky to get a grip on. One reason is that health care costs–from premiums to prescriptions –are likely to keep rising. The inflation rate for health care costs has been running around 3.6 percent, more than triple the 1 percent that consumer good prices jumped in the past year.1
That’s a problem, particularly when you’re retired and living on a fixed income. Aside from the threat of rising prices, there’s a range of squishy individual variables that influence how much money you will need to have socked away to cover your healthcare tab.
The biggest factor is how long you’re going to live, followed by your age when you retire, the status of your health and where you live. And there’s no way to estimate the potential financial hit from a catastrophic health event like a heart attack, a stroke, or cancer.
While Medicare forms the spine of almost every retiree's health plan, it is not all-inclusive. For example, you may have costs for premiums, deductibles and co-pays for doctor visits. And Medicare doesn't cover things such as long-term care, or dental and vision insurance.
A recent analysis by HealthView Services, which designs health care cost projection software, is unnerving. Total projected health care premiums (Medicare Parts B, D, and supplemental insurance) for a healthy 65-year-old couple retiring this year are expected to be $288,400 in today’s dollars ($435,472 in future dollars). This assumption is based on the average U.S lifespan of men (age 87) and women (89).2
If out-of pockets such as deductibles, copays, hearing, vision, and dental are included in the calculation, expenses in today’s dollars are expected to be $377,412 in today’s dollars ($567,903 in future dollars).
And for women, healthcare costs will be higher, due to a slightly longer life expectancy of up to four years, than their male counterparts. Those extra years, coupled with the impact of a compounding inflation rate, mean that women will, on average, spend more than males on retirement health care, according to the report.
That said, here are several steps you can take now to prepare.
Run a calculation to get a rough estimate. Use a calculator like this one from or this one from AARP to get an estimate that takes your individual information into account. I ran my data on the AARP calculator. It asked my height, weight, age–55, the age I expect to retire, 65, and age I expect to live-84, among other factors. My total health care cost estimate was $154,928. The amount that should be covered by Medicare: $93,787. My estimated shortage: $ 61,141. You can play with the numbers to tweak, but I admit felt a little better after using the calculator.
Check with your employer’s medical plan. If you’re nearing retirement, find out whether your employer offers retiree healthcare benefits and learn the nitty-gritty about the coverage. You may have to be a certain age, or have a specific number of years of service to qualify for post-retirement benefits, and there may be limits on the amount they will pay.
Consider a health savings account, known as an HSA. These accounts must be paired with an eligible high-deductible health insurance plan. The money you put into the accounts is tax-free: either your employer takes it before taxes are assessed, or you can deduct the amount from your tax return if the account is held at a bank or other institution that is not affiliated with your employer. It grows tax-free and is tax-free when used for health-related qualified medical expenses for you, your spouse or a qualified dependent. These expenses include deductibles, copays and coinsurance, prescription drugs plus other qualified medical expenses not covered by your plan. Insurance premiums, however, usually cannot be paid for with HSA funds. In addition, any withdrawals for non-qualified expenses will be subject to income tax and may be subject to an additional 20% tax. Not sure if your insurance plan is considered high-deductible? A good place to start is asking HR or your plan administrator.
Your HSA balance rolls over from year to year, so the earlier you start, the better, because you can give your money more time to grow tax-free. HSAs can be invested in mutual funds, stocks and other investments. However, investment choices may be limited to those options being offered by the bank or institution where your HSA is held. If your goal is to use the money for retirement health-care expenses, you may want to consider investing some of it in stocks that may be able to beat inflation over the long-haul. That's good news.
Once you’re over age 65 and enrolled in Medicare, you can no longer contribute to an HSA, but you can still use the money for out-of-pocket qualified medical expenses. Meantime, there are no minimum required distributions at 70½ like other retirement accounts, and you can leave any remaining funds when you die to a named beneficiary. The money you put into an HSA doesn’t affect the contribution limits in place for IRAs, so you could potentially see this as another way to save for retirement, with medical care in mind, specifically. Ask your tax professional for details, including contribution limits. Here’s the link to the IRS page about Health Savings Accounts .
Build an emergency fund. Salt away around a year’s worth of daily living expenses. Here’s why. If you need to tap your retirement investments for uncovered medical emergencies in retirement, you risk spending down your tax-deferred savings quicker than you planned. And if you must sell stocks in a down market, you’ll need to take a bigger share to get the funds you need.
Tapping your investments to pay for unexpected medical bills could also spark some tax penalties. If you draw money from a taxable account, for instance, the income could push you into a higher tax bracket and cost you even more.
While you’re still earning an income, start siphoning money into a savings account. To jumpstart your emergency savings, you might earmark your tax refund, or set aside a bonus at work for this account.
One great way to save that I’ve found handy over the years is to set up automatic transfers each month from my checking account into a money market account or another savings account. You can start by transferring small amounts and then increase it over time.
Keep up healthy habits. Yes, a healthy lifestyle is the best way to keep your health bills down on an annual basis. Although there’s no guarantee, of course, do all you can to stay in shape, eat well and don’t smoke. One proviso: You might end up living longer, and, well, you know what that means.
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October 19, 2016