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

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Healthcare costs in retirement can rise to between $300k and $400k depending on where you live, how long you live and how healthy you are. The healthier you are, the more you need to save.

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Retiring? How much you'll actually need for healthcare

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.

How Much will Healthcare Cost Me in Retirement

Depending on where you live, the average 65 year old couple retiring today can expect to pay between $300k and $390k for healthcare in retirement. If that seems like a big range, that’s because there are a few factors that go into this calculation:

  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 $300k-400k Needed for Healthcare in Retirement?

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.

Options when Saving for healthcare in retirement

  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 annual contribution limit for an HSA in 2021 is: $3,600 for someone with an individual High Deductible Health Plan (HDHP) and $7,200 for someone with a family plan. 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 2021 annual contribution limit for 401ks is: $19,500 with a $6,500 allowable catch-up contribution if you’re aged 50 or older.The 2021 annual contribution limit for Traditional IRAs is: $6,000 with a $1,000 allowable catch-up contribution if you’re aged 50 or older. 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.The 2021 annual contribution limit for Roth IRAs is: $6,000 with a $1,000 allowable catch-up contribution if you’re aged 50 or older.

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 here at Lively.

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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