Healthcare costs have become a hot topic of conversation recently as our legislators continue to grapple with how to provide access to affordable health insurance for all Americans. But one aspect of healthcare costs that hasn’t gotten as much attention is managing these costs during retirement.
Medicare Isn’t a Panacea
Many people believe that once they turn 65 years of age, all they have to do is apply for Medicare and all their healthcare costs will be covered. In reality, it’s not this simple. Retirees on Medicare have to pay monthly Medicare premiums as well as copays, coinsurance and annual deductibles. There are also other Medicare expenses that must be covered out-of-pocket.
Adding to the challenge is the projected future rate of healthcare inflation. According to Bloomberg, healthcare inflation is expected to rise at an annual rate of 5.5 percent over the next 10 years — almost triple the U.S. annual inflation rate.
According to the Employee Benefits Research Institute (EBRI), the average 65-year-old couple will need about $270,000 in order to have a 90 percent chance of paying for their retirement healthcare expenses. This figure doesn’t include long-term care expenses and is over and above what’s covered by Medicare and Medicaid.
Three Questions to Ask
These factors and more make clear the importance of planning not only for how you’ll cover your lifestyle expenses in retirement, but also how you’ll pay retiree medical expenses. Start by asking yourself a few questions:
- When do you plan to retiree? This will have a big impact on how much extra money you might need to save for retiree healthcare expenses. The further out your projected retirement date, the more time you’ll have to save. And the longer you continue working and remain on your employer’s health plan (assuming you have such a plan), the fewer years in retirement you’ll need to plan for.
- What is your general health condition? Of course, there’s no way to predict what your health condition will be when you retire. But your health condition now and your family health history might provide a good indicator of what it could be like in the future. If you have chronic health problems or a family history of such problems, you might need even more money that the average person to cover your retiree healthcare costs.
- Will you have access to any retiree healthcare benefits from your employer? This benefit isn’t as common today as it used to be, but there are some companies that still offer it. Ask your human resources department whether you will have access to any kind of company-sponsored health insurance or benefits after you retire and what your out-of-pocket costs might be.
HSAs: An Effective Savings Tool
One popular tool for saving additional money for retiree healthcare expenses is a Health Savings Account (HSA). Funds are contributed to an HSA on a pre-tax basis and the money isn’t taxed when withdrawn if it’s used to pay for qualified medical expenses. You can make annual contributions of up to $3,400, or $6,750 for your entire family, to an HSA (in 2017) until you turn 65 years old and become eligible for Medicare. This amount is $1,000 higher if you’re 55 years of age or over.
HSA funds can be used to pay for out-of-pocket medical expenses at any age — you don’t have to wait until you’re retired to tap your HSA. Funds that you don’t use now roll over year after year, so if you’re relatively healthy, you could build up a nice-sized nest egg to help pay for retirement healthcare expenses.
Don’t hide your head in the sand when it comes to paying for healthcare expenses in retirement. Based on your answers to these questions, formulate a plan now for how you’ll pay for retiree healthcare expenses.
Please contact us if you have more questions about planning for retiree healthcare expenses.