How to Prepare for Health-Care Expenses in Retirement

Being proactive may help protect your hard-won retirement savings from the health expenses Medicare doesn’t cover.

Health care is one of the services most of us rely on at any age, but it is essential in our retirement years. And despite the cushion provided by Medicare, health-care costs can result in a significant drain on savings intended for future generations, leisure or other pursuits.

What’s more, with increases in inflation, Medicare premiums and consumer prices, the funds needed to cover health-care costs in retirement are projected to rise significantly. According to one 2022 study, a 65-year-old couple can expect to spend more than $300,000 on health care in retirement. And that figure is likely to be even higher for younger Americans who are still working.

“A common misperception is that we hit 65 and Medicare has us covered,” says Marla Simmons, a Private Wealth Advisor at Regions in Birmingham, Alabama. “But in fact, many of us will stop working before age 65, which is the minimum age for Medicare to kick in. And after that, there are many health-related expenses that Medicare simply doesn’t cover.”

Fortunately, there are steps you can take to cover routine and unexpected care after you stop working, and it’s never too early to start. Here are a few points to consider.

Point No. 1: You May Want to Retire Before 65

For most people, the initial enrollment period for Medicare Parts A, B and D comes when they turn 65. It’s not an option for people who retire at any earlier age.

“If you retire before 65, you have a few choices,” Simmons says. “You can opt for COBRA, which extends the health coverage you had with your employer, or you can buy private insurance on the open market.” These two options are not cheap: Either could easily cost $20,000 to $30,000 per year in premiums.

Another option is to pay for all your expenses out of pocket. “That might seem like a good idea if you have no preexisting conditions and are in great health,” Simmons says. “But one catastrophic event could leave you in a very difficult financial position.”

Point No. 2: Medicare Has Coverage Gaps

While many expenses are covered by Medicare, it comes with premiums and deductibles, like employer-based or private insurance. More importantly, long-term care is not covered by Medicare. “There’s a high probability that a 65-year-old will need long-term care at some point,” Simmons notes. “And one in five will need it for as long as five years.” This care is expensive, ranging from a monthly median of $1,690 for community-based day care for adults to $9,034 for a full-time private room in a nursing facility.

Medicare may cover up to 100 days of long-term care, but typically it covers only shorter stays. “Custodial care, which includes long-term care, is potentially the largest drain on a family’s resources,” Simmons states.

Because of the complexities, it can be useful to consult an insurance professional to help you navigate the complexities of Medicare coverage and its gaps. If you are still not ready to retire, however, there are steps you can take to prepare for future health expenses now.

Point No. 3: You Can Prepare With a Tax-Advantaged HSA

Health savings accounts (HSAs) are savings accounts you can use to pay for qualified medical expenses with tax-free withdrawals (your contributions are also tax-deductible). Your contributions also earn tax-free interest.

HSA withdrawals can cover many health-care expenses, including dental and vision care. They even can be used to pay for some Medicare premiums once you enroll. (Keep in mind that once you enroll in any part of Medicare, you can no longer fund an HSA.)

You can contribute a maximum of $3,850 to your HSA annually if you have self-only coverage, and up to $7,750 for a family. There is a $1,000 catch-up contribution you can add to those totals if you are 55 or older.

“HSAs are a great tool since they roll over year to year, so even if you don’t need them in a given year, you build up a balance,” Simmons says. “And you can use the funds to cover your spouse’s medical expenses, or your children’s, as well as your own. If you start contributing early, you can build significant resources that can help pay for expenses before or after you’re eligible for Medicare.”

Point No. 4: Consider Long-Term Care Insurance

Since Medicare coverage does not include most long-term care costs, it’s important to have a plan that protects funds you’ll need to live on in retirement.

Long-term care insurance is worth considering, especially if you are in your 40s or 50s. The closer you are to retirement, the more expensive it’s likely to be.

You can buy specialized insurance policies that will cover the cost of custodial care, or you can look into hybrid products, such as a rider on a life insurance policy or an annuity that includes a long-term care benefit.

Some people opt to cover custodial care with money market accounts with high interest rates, or with life insurance policies that allow tax-free advances on a death benefit. It can be helpful to consult a wealth manager to help you determine what option will best serve you in your retirement.

What’s most important is to have a plan and consider your options before you need custodial coverage. “Long-term care planning is essential to wealth and retirement planning,” Simmons says. “You don’t want to wait until you’re actually living your golden years.”

Talk to Your Regions Wealth Advisor About:

  1. Getting a head start on planning for retirement health care as an essential part of wealth management. You can begin preparing at any stage of your working life.
  2. Taking advantage of any employer-sponsored savings, such as health savings accounts.

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