Dec 24, 2018

Managing Healthcare Expenses in Retirement

By Heather Kelly

Photo credit: Getty Images

How we fund our healthcare expenses in retirement is so important and they are among the biggest decisions we’ll ever make. Unfortunately, these decisions are often made without much education or guidance in the matter.

Most of us spend our working lives with health insurance secured through our employers. This arrangement means we have no need to explore our health insurance options in the marketplace or negotiate our own plans. Typically, we are given the choice of one, two, or possibly three employer-sponsored plans to choose from. This is relevant because once a person enters retirement and they move into the realm of Medicare and other health insurance options, there are numerous plans and carriers to navigate, and this prospect can seem daunting to the unprepared.

And make no mistake – any decisions made regarding the funding of healthcare expenses will have a significant financial impact, and most retirees vastly underestimate how much money they will need to pay for healthcare in retirement.

The numbers are substantial. According to a 2018 report from Fidelity, an average 65 year-old couple will spend more than $280,000 dollars over the course of their retirement on healthcare, and this doesn’t include additional expenses, such as dental and vision services, over-the-counter medications, foot care, hearing care, and nursing home or long-term care. Most retirees will spend more on healthcare than any other single expense, and the costs are expected to only increase over time.

One reason why retirees underestimate their healthcare expenses is because they erroneously assume that most of their healthcare costs will be covered by Medicare. However, this is unfortunately not the case. Medicare Part A is free and covers hospital visits but insurance premiums for Medicare Part B (doctor services and outpatient care) have to be paid out-of-pocket. There are also premiums, co-pays and deductibles which have to be met for Medicare Part D (which covers the cost of prescription drugs).

So, what can you do to help manage your healthcare costs in retirement? Fortunately, there are a few constructive steps you can take to support the funding of your healthcare expenses:

Establish a Healthcare Investment Account

It is advisable to establish a dedicated investment account – separate from your other retirement accounts – to specifically save and invest to meet your expected healthcare costs. An Individual Retirement Account can be used for this purpose. The theory is that earmarking money with a specific intention makes it more likely that your goals will be successfully achieved.

Establish a Health Savings Account

Alternatively, if you have a high-deductible health insurance plan (which is defined as a plan that has a deductible of at least $1,350 per year for an individual or $2,700 for a family), you can open a Health Savings Account (HSA). There are several tax advantages when establishing an HSA. Any contributions made to an HSA are tax-free (though there's a limit of $6,900 per year for families). Also, the earnings grow tax-free and if the funds are used for qualifying medical expenses, then the entire distribution is non-taxable to the IRS.

Acquire Long-Term-Care Insurance

In a previous blog, I mentioned the importance of acquiring long-term care insurance, and it is an essential component in the strategy to defray healthcare costs in retirement. More than 50% of people who are 65 or older today will need long-term care at some point in the future, and a traditional long-term-care insurance policy helps to cover nursing home, assisted living or home care expenses.

Protect Your Health

One way to save on healthcare costs is to be more active and physically fit, to eat more nutritiously, and to avoid unhealthy habits (like smoking cigarettes or an overindulgence in alcohol). In addition to feeling better and being more productive, there are financial benefits, too. According to the Kaiser Family Foundation, a person in poor health spends an average of about $1,700 a year more on out-of-pocket medical expenses than someone in good health. Also, spending less on medical expenses allows you to spend more money on those activities that make your retirement more enjoyable.

Navigating the Medicare Maze

As one plans for and approaches retirement, there are serious and consequential questions that need to be asked and answered:

  • When Should I Retire?
  • Should I Start Receiving My Social Security Income As Soon As Possible?
  • When Should I Sign Up For Medicare?
  • When Should I Buy Long-Term Care Insurance?

These are important decisions to make and it is always advisable to seek the professional counsel of a financial adviser to effectively plan for these milestone events.

In order to help our clients navigate the often complicated maze that is the Medicare program, United Capital has recently partnered with Medicare BackOffice – a team of professional insurance agents who are licensed and certified in all 50 states to offer Medicare products and advice.

Through this partnership, United Capital Advisers can now refer clients to the Medicare BackOffice agents, who can better answer their Medicare questions, compare plans, and maybe even help them find potential cost savings.

Obviously, there are many challenges that retirees face in order to adequately meet their healthcare costs in retirement. But by receiving the best possible financial planning advice from professional experts, they will be able to enter into retirement with the security and confidence they deserve.

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