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Will healthcare costs devour your retirement income? New estimates may cause you to adjust your retirement plans.
The dream is that you will eventually turn 65 and all your healthcare worries will be covered by Medicare. I hate to be the bearer of bad news but in the real world, healthcare costs in retirement years can take a ridiculously large chunk out of your retirement income.
The average 65-year-old couple retiring this year will need about $280,000 to cover healthcare in retirement, according to a new study from Fidelity. That stunning amount is more than many households have saved. The estimates are about half that figure for single folks. It’s important to point out that women can expect to spend a bit more as they tend to live longer. Perhaps equally important is that long-term care expenses are not included in that total. Ouch!
“There is no way I will spend that much on medical care in retirement,” you may be saying. “I’ll be covered by Medicare at 65.” While that may be true, there are still monthly premiums for Medicare Part B (which covers doctor visits, surgeries, etc). Premiums will also be incurred for medication with Part D. These two things alone make up about 35% of the estimated costs in retirement while the remainder is the cost-sharing in and out of Medicare that you will have for co-payments and deductibles. That includes out-of-pocket expenses for prescriptions drugs.
Nursing home or long-term care costs will be extra as will dental expenses. As you can see, things add up quite quickly.
Can you contain the costs of healthcare in retirement?
As a retiree you can buy supplemental coverage plans. Often called Medigap insurance, these types of plans can potentially help cover some of the things that Medicare does not. On average, those premiums would lead back to around the same basic cost estimate.
Four in 10 retirees said their retirement expenses are higher than expected, according to the EBRI 2018 Retirement Confidence Survey. About the same number of those retirees surveyed admitted to not calculating their health care expenses before they retired. One third of respondents admitted to having no idea what to expect in regards to health care expenses in retirement.
Wait it gets worse:
These cost estimates continue to go up year after year. If you are planning to retire years down the road, your expected costs will likely be much more than the $280,000 estimate.
If we dig back to 2002 (the first year Fidelity did their estimate), those expected costs are up 70%. The cost increases are compounding well beyond inflation, which can be devastating to those on a fixed income. What might be barely affordable at 65, will be impossible at 85.
Health Savings Accounts to the rescue?
The Health Savings Account (HSA) is a tax-favored account used for health care expenses. You get a deduction for contributions, invested money is able to grow and you’re able to withdraw the money, tax free, if used for qualified medical expenses. HSAs accompany high-deductible health insurance plans. Some people are using them like an additional retirement account by letting the account grow until much later in life.
Invest in your health now:
Living a healthy lifestyle won’t eliminate medical expenses but it can’t hurt. A gym membership and an annual physical is much less costly than a knee replacement and physical therapy. To get a sense of how much money you can save by staying healthy, check out the AARP’s health-care costs calculator. You will get a rough estimate of costs based on your weight, gender, height and location. You can add in various health conditions to see how they affect your health care costs. You can also change your weight to see how much dropping 10 pounds might save you over your lifetime. If health, longevity and money aren’t motivators to lose weight, I don’t know what is.
Whether you are just about to retire or just entering the work force, the prospect of financial independence should be inspiring. Achieving it could potentially leave you feeling less stressed with more time to travel and spend with family and friends. You may also have the time to get to all those things you weren’t able to in the past.
Pay attention to your health and develop or maintain healthy habits. Healthcare, travel and retirement will be much less expensive and much more enjoyable if you are healthy and happy.
