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How Seniors Can Budget for Healthcare

6 min read

30 sec brief

When we daydream about post-retirement life, we may forget to consider our future healthcare needs, and perhaps more importantly, how we plan to pay for them.  Most U.S. seniors will get Medicare, provided you’ve worked long enough to qualify. It’s important to know that Medicare coverage is not free. Many get Medicare Part A premium-free…

When we daydream about post-retirement life, we may forget to consider our future healthcare needs, and perhaps more importantly, how we plan to pay for them. 

Most U.S. seniors will get Medicare, provided you’ve worked long enough to qualify. It’s important to know that Medicare coverage is not free. Many get Medicare Part A premium-free because they paid Medicare taxes while working. However, there are Medicare Part B (medical insurance), Medicare Part D (prescription drug coverage) and possible supplemental insurance premiums you’ll have to pay. There will also be out-of-pocket costs to cover. 

Let’s discuss the healthcare costs you’ll face during retirement and ways to budget for these expenses. 

A Closer Look at Healthcare Costs for Seniors

There are a few types of healthcare costs you’ll likely have during retirement.

  • Medicare Part A (Hospital Insurance) costs 
  • Medicare Part B (Medical Insurance) premiums 
  • Medicare Advantage Programs (known as Medicare Part C) – or – 
  • Medigap (known as Medicare Supplemental Insurance) 
  • Medicare Part D (prescription drug coverage) premiums 
  • Long-term insurance premiums

Here is some information about each of these costs:

Medicare Part A (Hospital Insurance)

While many seniors will receive Medicare Part A premium-free, there are still associated costs you’ll be responsible for. There are deductibles for hospital and Skilled Nursing Facility stays, among other expenses.

Medicare Part B (Medical Insurance)

In 2019, the standard Medicare Part B premium is $135.50 (or higher) depending on your income.

You’ll pay the standard premium amount (or higher) if:

  • You enroll in Medicare Part B for the first time in 2019
  • You don’t receive Social Security benefits 
  • You’re directly billed for Part B premiums 
  • You qualify for Medicare and Medicaid, and Medicaid pays your premiums 
  • Your modified adjusted gross income from 2 years ago is above a certain amount

If you are in one of these five groups, refer to Medicare Costs at a Glance, to get an idea of what your Medicare Part B premium may cost. In general, Part B premiums increase as your income goes up.

Medicare Part C and Supplemental Insurance

If you’re looking for insurance to cover costs not covered by basic Medicare, consider buying a Medigap policy or a Medicare Advantage Plan. 

Medigap policies may not cover dental, vision, and eye care costs. These services add up fast and you may end up with some significant expenses.

Some Medicare Advantage plans offer dental, vision and eye care coverage, but may not provide as much additional hospitalization coverage.

Medicare Part D (Prescription Drug Coverage)

Medicare Part D premiums are based on income as reported on your IRS tax return. If your income is above a certain amount ($85,000 in 2017), you’ll also pay an income-related monthly adjusted amount in addition to your premium. Take a peek at this Medicare chart to get an idea of what to expect based on your personal situation.

Long-term Care Insurance

Medicare doesn’t cover many of the costs associated with Long-Term Care. If you want to make sure you’ve got money to cover these costs, you’ll want to consider a long-term care insurance policy.

How Much Can I Expect to Pay for Healthcare During Retirement?

The answer to this question will vary from person to person. There are online healthcare cost calculators that can help you estimate how much you may need to cover retirement healthcare costs. 

As an example, a 67-year-old married female with an annual income of $60,000, retirement savings (IRA, 401K, etc.) of about $150,000, and no long term illnesses, two online calculators estimated she would need well over $200,000 to cover her retirement healthcare costs. 

This number was based on 20 years of retirement. Based on that number, you’ll need over $800 a month just for healthcare costs (20 years x 12 months = 240 months. $200,000/240 = $833.333/month). Again, that’s just for one spouse, so be sure to double it for a married couple.

Ways to Reduce Retirement Healthcare Costs, Now

For those with high incomes, $85,000 per individual or $170,000 per couple in 2018, the more income you have, the more you’ll pay for Medicare Part B and D premiums. 

There are ways to manage finances to keep your premiums from rising as much as they would otherwise. Be sure to talk with a tax or retirement planner to make sure you are aware of all your options.

Here are a few ideas:

  • Health Savings Account (HSA) distributions, cash value life insurance policies and income from reverse mortgages aren’t counted in the formula for your Medicare Part B premiums. 
  • Roth IRA withdrawals aren’t part of the formula for Medicare Part B premiums. If you have a lot of money in traditional IRAs, consider converting some of it into a ROTH before you reach age 65. 
  • Traditional retirement account withdrawals may help offset deductible expenses.

Ways to Cover Future Healthcare Expenses

If you have a qualifying High Deductible Health Plan (HDHP) that can be paired with a Health Savings Account (HSA) but haven’t set one up, consider opening an account and contributing as much as your current budget allows. 

A nice feature of HSAs is the “catch up” contributions available to those 55 and older. You can contribute an additional $1,000, above the annual limit, to your HSA each year. Be aware, this option ends once you’re eligible for Medicare, as it is not an HSA qualified health plan. 

If you don’t have an HDHP, consider opening a savings account to devote totally to healthcare savings, or add more money to an existing ROTH IRA. 

Once you’ve got an idea of how much healthcare may cost during retirement and ways to fund it, you can continue planning the fun part of your golden years!

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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