3 tips to help you plan for your healthcare needs in retirement

Healthcare may be one of your top expenses in retirement.

The average total cost of healthcare in retirement for individuals age 70 and over is about $122,000 per person.1 While none of us like to think about what may happen to our health, one of the largest parts of your retirement budget may be healthcare. And with the COVID-19 pandemic impacting the state of healthcare—and potentially the costs associated with it—managing personal health and its associated expenses is top of mind for many people.
Watch this short video about some important things to know regarding managing your healthcare expenses in retirement. After the video, we’ll provide some strategies that may help you prepare for potential healthcare expenses—especially if they’re higher than average.
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5 things you need to know

1. Start saving with a Health Savings Account

A Health Savings Account (HSA) allows you to set aside money on a pretax basis every year (similar to an IRA, 401(k), or 403(b) retirement savings plan), and that money can then be used for qualified healthcare expenses. You must be enrolled in a high-deductible health plan to participate. Your available balance rolls over year after year, and you can use it at any time, provided it’s to cover an eligible healthcare expense. Depending on which institution manages your HSA, you may also be able to invest a portion of your HSA balance, giving it the potential for growth. There is a limit on the amount of money you can put into an HSA each year—for 2020, that’s $3,550 for individuals and $7,100 for families. Similar to retirement accounts, there is a catch-up contribution allowed for those age 55 and over of an additional $1,000 annually.

Health Savings Account contribution limits

Graphic showing small contribution limit increases for health savings accounts between 2020 and 2021
Source: Internal Revenue Service

2. Review your insurance options

Most retirees use Medicare, but even within that system there are different options. You may also want to consider supplemental insurance, known as Medigap, to help cover costs not covered by Medicare, although you’ll need to consider how any premiums and deductibles would impact your out-of-pocket spending. Since Medicare generally doesn’t cover long-term care, you may also want to consider long-term care insurance. Some companies offer what are known as “hybrid” policies that may cover long-term care if you need it or convert that benefit into traditional life insurance if you don’t.

3. Think about other sources of retirement income

Because healthcare expenses are generally an unknown, you may feel more confident if you have a reliable source of guaranteed retirement income, such as regular payments generated by annuitizing some funds to create lifetime income.  The annuity income may be able to cover your regular monthly expenses, and you can tap into other retirement or investment accounts if you have an unexpected and costly medical need.
No matter what strategy you choose, it’s important to keep in mind how you want to receive healthcare in the future, because that can significantly impact the cost. Home health options are increasing as technology makes it easier to connect with doctors from home or have them monitor your conditions remotely. If you explore home care as an option, consider how any family members may be impacted financially if you ask them to be your caregiver. Keep in mind that other services, such as home custodial care, might be needed to assist with cooking, cleaning, and other chores. If your care needs are limited, another option may be a continuing care retirement community (CCRC). These flexible-lifestyle communities, which have recently grown in number, support older adults who may only need limited care to start but who could eventually need more care in the future. Residents in CCRCs can adapt their living arrangements to evolving healthcare needs without having to move from one place to another. Your choices may help determine how you and your financial advisor work together to set up a savings plan.
For more tips on medical costs and COVID-19, watch our video.

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1 National Bureau of Economic Research report: The Lifetime Medical Spending of Retirees, May 2018.
Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.