Too Many Underestimate Healthcare Costs In Retirement


Healthcare expenses can cost an insured couple $220,000 in retirement, yet many people aren’t planning for any of those costs let alone a fraction of it.

According to a recent Merrill Lynch Retirement study, only 15% of pre-retirees said they have attempted to estimate how much money they would need for healthcare and long-term care in retirement.

The reasons people aren’t planning for healthcare costs vary. For some they don’t think they will get sick as they age while for others they wrongly think Medicare will cover everything. Either way lots of people are going into retirement with inadequate reserves to cover any healthcare issues that will undoubtedly come up.

“Overall the general public is drastically underestimating the cost of healthcare in retirement,” says Derek Gabrielsen, Wealth Advisor with Strategic Wealth Partners. “Everyone is solely focused on retirement planning they think the only thing that’s important is their investments and return on them.”

Healthcare costs get pricey

While coming up with a number for healthcare costs isn’t easy, Jeremy Kisner, senior wealth adviser at Surevest Wealth Management, says there are some expenses retirees can expect right off the bat. For example he says Medicare Part B is going to cost an individual around $1,260 a year while the Medicare Part D drug benefit will be another roughly $581 per person each year.  What’s more a policy to cover Medicare gaps (deductibles and co-pays) will likely cost you around $150 a month. Those numbers don’t take into account out-of-pocket costs or long-term care needs.  Medical costs can easily exceed $5,000 a year per person in the beginning of retirement and will likely increase at a higher rate than inflation, says Kisner.

In a perfect world you would have enough money saved to cover every expense in retirement but that’s not the case for millions of Americans nearing retirement.  But it also doesn’t mean you won’t be able to afford your healthcare costs, granted you start planning now. From carving out more of your money for healthcare to utilizing a health savings account, here’s how to get some of the future health expenses under your control.

Accept the reality that it will cost a lot

Half the battle to making sure you have enough saved for healthcare is to accept the reality that it can easily cost an individual $5,000 and a couple $10,000 a year out of pocket. Wendy Weaver, a portfolio Manager at FBB Capital Partners says acknowledging there will be health expenses forces people to think about how to pay for them and thus starts them on the road to saving.  “Knowing you are paying for your health insurance premiums and healthcare costs is a big part of it,” says Weaver. “The other thing is to save as much as possible while you are still working.”

Take advantage of a HSA

One way to save, say experts is to take advantage of a health savings account if your company offers one. Many employers offer a HSA coupled with a high deductible health insurance plan, enabling you to save money tax free for future healthcare costs. The money in the account can be rolled over each year and used once you are in retirement without have to worry about using it or losing it.

“Health savings accounts are more and more becoming part of corporate health plans,” says John Sweeney, executive vice president at Fidelity Investments. “An HSA has three important tax advantages. It goes in and reduces your taxable income, it grows tax deferred and when you take it out for qualified medical expenses, it’s tax free.” According to Sweeney, many people that use a health savings accounts will try to pay for as many medical expenses out of pocket and let the money in the HSA continue to grow. If they have some health event down the road they can tap into that nest egg.

Have a contingency plan for long-term care

In addition to taking advantage of any tax free vehicles for healthcare expenses, experts say the amount of money going for future healthcare costs have to be bumped up. You also have to know how you will pay for long-term care if it’s ever needed.

“They need a contingency plan for any type of home health care or long term care,” says Kisner. “If they have long term care insurance that’s great. If they don’t, they have to know what asset they are going to tap.”  Pre-retirees can take out long-term care insurance but the price for that peace of mind continues to go up and is cost prohibitive for many. Another option, according to Kisner is to take out a life insurance policy that can be used for long-term care as well.

Taking Care of yourself

One of the cheapest ways to reduce your overall healthcare costs is to be healthy before you retire and during retirement. That means eating healthy, getting enough exercise and sleep, avoiding smoking and making sure you keep your mind sharp. “The non-financial you can control is important as you prepare for retirement and are in retirement,” says Weaver.