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Retiring? How Much You'll Actually Need for Healthcare Costs

Lauren Hargrave · May 17, 2022 · 5 min read

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Your golden years should be filled with hobbies, grandchildren, travel, long mornings and anything else you’ve been dreaming of. They shouldn’t be filled with anxiety about money. But if you fail to factor healthcare costs into your budget for retirement, money worries could quickly start to fill your days.

Estimating the cost of your medical expenses

Depending on where you live, the average 65 year old couple retiring today can expect to pay about $315,000 for healthcare in retirement. Single retirees can expect to pay $150,000 for men and $165,000 for women, but these estimates can vary.

However, this range can vary and retirees may expect to pay even more. There are a few factors that go into calculating how much you will need for medical care in retirement:

  1. Where you live

  2. How healthy you are

  3. How long you live

  4. Whether you qualify for supplemental government-funded insurance

Compare these two women:

  • A healthy 55 year-old woman will spend: $13,156 in annual out-of-pocket medical expenses when she’s 65 (according to HealthView Services).

  • A 55-year old woman with Type 2 diabetes will spend: $16,635 in annual out-of-pocket costs at age 65 (according to HealthView Services). Which sounds like good news if you’re the healthy 55-year old. However, if you’re healthy, you’re also expected to live longer.

So when we look at the total expected lifetime healthcare costs for the two women:

  • The healthy 55-year old can expect to pay $424,875 in out-of-pocket medical costs.

  • The diabetic 55-year old can expect to pay $266,163 in out-of-pocket medical costs.

So if you’re healthy, you actually need to save more. And regardless of where you fall on the healthy spectrum, the truth is: Americans are living longer and the cost of healthcare is rising. And this trend is expected to continue.

So what can you do about it? First, understand what this cost estimate entails.

What’s included in the estimated $315,000?

Many people think that Medicare will cover all or most of their medical costs in retirement. But that’s not the case. First of all, there isn’t just one Medicare. There’s actually four parts:

  • Original Medicare Part A: covers inpatient hospital stays, skilled nursing facility fees, hospice and some home healthcare. As long as you paid Medicare taxes while working, Part A is free.

  • Original Medicare Part B covers: doctor visits, outpatient care, medical supplies and preventative services. Everyone pays a premium for Part B and that premium is assessed based on your financial situation.

  • Medicare Advantage (part C): This health insurance plan covers the same expenses as Medicare parts A, B and D, with some additions like vision, hearing and dental. You will have to pay a premium to buy this type of insurance.

  • Medicare Prescription Drug Coverage (part D): Part D covers prescription drugs. You will have to pay a premium for this coverage.

Here’s a list of what Medicare doesn’t cover:

  • Long-term care (including assisted living expenses)

  • Most dental care

  • Eye exams related to prescribing glasses

  • Dentures

  • Cosmetic Surgery

  • Acupuncture

  • Hearing aids and exams for fitting them

  • Routine foot care.

  • Any specialty drugs not covered by your Medicare part D health plan.

It’s important to remember that Medicare functions like traditional health insurance plans. That means there’s going to be services, supplies and prescriptions your plan(s) cover completely, or almost completely, and costs for which you’re responsible.

So you need to plan ahead and start saving so that your entire nest egg doesn’t go towards medical bills.

Your savings options

  1. Health Savings Accounts. One of the best ways to save for healthcare costs in retirement is to open a Health Savings Account (HSA). This type of account is triple tax-advantaged because: contributions are made pre-income tax, it grows tax-free, and when you use your savings for qualified medical expenses, your distributions are tax-free as well. If you have an HSA, you can even invest your savings so that they grow at the rate of the market. The IRS announces annaul contribution limits for HSAs, which differ whether you have an individual or family account. If you’re age 55 or older, you can contribute an additional $1,000. If you want to open an HSA, you must have an eliguble health plan, like a HDHP. See full list of eligiblity details here.

  2. 401(k)s and Traditional Individual Retirement Accounts (IRAs). These accounts are also tax-advantaged because contributions and any gains those contributions make are tax-free. But once you decide to take distributions from your 401k or IRA, you will pay income taxes on the withdrawn amount. Contributions made to 401ks and IRAs can be invested. The IRS also sets annual contribution limits for these types of plans. To open a 401(k) or Traditional IRA, your employer must offer the option as part of its benefits package.

  3. Roth IRAs. Contributions to Roth IRAs are made post-income tax. As such, when you start to take distributions from your account, you will not pay income taxes on the withdrawn amount. Contributions to Roth IRAs are invested in the market and any gains remain tax-free. Annual contributions to Roth IRAs are also set by the IRS.

As you can see, healthcare costs in retirement could mount quickly, even if you’re “fully” covered by a Medicare Advantage plan. The good news is that there are many ways to save. If you have questions about the different savings options available to you through your employer, reach out to your HR Department. If you’re interested in hearing more about a Self-Directed HSA, contact us at Lively.

Lauren Hargrave

Lauren Hargrave

Lauren Hargrave is a writer from San Francisco who focuses on technology, finance and wellness. She follows comedians like most people follow bands and believes an outdoor sweat session can cure almost any bad mood. She’s also been writing her first novel for so long, her mom doesn’t ask about it anymore.

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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.



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