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Worried About Major Health Expenses in Retirement? How To Prepare Your Finances Now

Hero Images / Getty Images
Hero Images / Getty Images

As you get closer to retirement, there are a lot of things that need to be considered. A recent GOBankingRates survey found that nearly 59% of Americans are worried about running out of money and 51% feel their biggest worry is how they’re going to pay for healthcare expenses.

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While there is no way to predict the future, the best thing to do now is to prepare your finances so you can be ready during retirement. Let’s explore some of the best ways to prepare yourself and finances for healthcare costs in your retirement years.

Keep Yourself Healthy Today To Minimize Costs in Retirement

The best way to hopefully avoid high medical bills in the future is to try your best to live a healthy life now. Of course, some factors are beyond your control, but doing everything in your power to stay healthy today can help minimize health-related costs in the future.

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Understand What Medicare Covers and the Costs Associated

Medicare is federal health insurance for people over age 65 and for certain people with disabilities. Different parts of Medicare help cover specific services. For example, Medicare Part A covers hospital stays, care in a skilled nursing facility, hospice care and some home healthcare. Medicare Part B covers certain doctor’s services, outpatient care, medical supplies and preventative services. Medicare Part D helps cover the cost of prescription drugs.

Medicare doesn’t cover long-term care, routine physical exams, eye exams, most dental care, dentures, hearing aids and exams for fitting them, cosmetic surgery, massage therapy and concierge care.

There also might be costs associated with Medicare, even if you qualify. If you or your spouse paid Medicare taxes while working for a certain amount of time, you usually don’t have to pay a monthly premium for Medicare Part A. However, everyone pays a monthly premium for Medicare Part B. The standard Part B premium amount in 2023 is $164.90. If you aren’t eligible for premium-free Part A, you may be able to buy Part A at up to $506 each month in 2023.

Factor Healthcare Costs Into Your Retirement Planning

When planning for retirement, you should factor in healthcare costs. According to the Fidelity Retiree Health Care Cost Estimate, a single person who is 65 in 2023 may need approximately $157,500 saved to cover healthcare expenses in retirement. An average retired couple age 65 in 2023 may need approximately $315,000.

Of course, exactly how much you’ll need will depend on where and when you retire, how healthy you are, how long you live and which accounts you use to pay for healthcare.

Set Up a Health Savings Account

Another great option is to use a Health Savings Account (HSA). This is a personal savings account that can be used only for medical expenses, including various medical, dental and mental health services.

To be eligible, you must be enrolled in a high-deductible health plan (HDHP). You also can’t be enrolled in Medicare, can’t have any other health coverage and can’t be claimed as a dependent on someone else’s tax return.

“Many people who have an HSA when they’re younger use the funds to pay for healthcare costs today, but the real power is when you fund it, let it compound and have it as a source of healthcare expenses in retirement,” said Brent Sabati, financial advisor with Modern Financial. “That way, you take full advantage of the funds compounding and the tax benefits. You can use your HSA for any qualified health expenses, co-insurance and copayments and deductibles.”

HSAs have tax advantages. You contribute to an HSA with pre-tax dollars, and you won’t pay income tax on that money. Earnings in the HSA also grow tax-free. Any money left in an HSA at the end of the year rolls over, so it is available for future health expenses.

One thing to keep in mind is that if you need to access the money for non-qualified expenses before you turn 65, you will owe income taxes plus a 20% penalty.

The annual contribution limits for an HSA in 2023 are $3,850 for individuals and $7,750 for family coverage.

Consider a Medicare Supplemental Plan

Since Medicare doesn’t cover all healthcare expenses, you can purchase Medicare Supplement insurance from a private insurance company to fill in the gaps. Medicare Supplement applies only to Original Medicare (Part A and B) and can’t be used with other private insurance policies.

There are many Medicare Supplement providers, and each covers different things and has different costs and rules. To be eligible for a Medicare Supplement plan, you must be enrolled in Medicare Part A or B, be 65 or older or receiving disability benefits, diagnosed with ALS or diagnosed with ESRD.

Medicare Supplement plans cover many out-of-pocket costs not covered by Part A or B, such as deductibles, copayments and coinsurance. Some Medicare Supplement plans also cover emergency medical services while traveling outside the U.S.

Understand the Medicare High Income Surcharge

The Income-Related Monthly Adjustment Amount (IRMAA) is a monthly Medicare surcharge for high-income beneficiaries. IRMAA is based on your modified adjusted gross income from two years ago, which is the government’s latest income data. IRMAA thresholds change yearly due to inflation.

Some people’s incomes increase in retirement due to Social Security, pensions and retirement plan withdrawals or distributions. This increased income can mean you will be hit with IRMAA surcharges.

If you owe an IRMAA surcharge, you may be able to reduce the fee if you have had a “life-changing event” that lowered your income — e.g., divorce or annulment, marriage, death of your spouse, work stoppage, work reduction, loss of pension income, involuntary loss of income-producing property or employer settlement payment due to its closure or bankruptcy.

Have a Plan for Long-Term Care Expenses

Planning for long-term care expenses is important because long-term care can be expensive. Long-term care includes home health visits, nursing care or assisted living facilities. These services typically cost thousands of dollars a year.

Sabati discussed how long-term care insurance is great for covering these types of expenses and may have additional benefits such as being able to cover a spouse as well. For these types of policies, it’s important to not wait too long to apply, because health conditions and age may make the premiums more expensive or may make you uninsurable altogether.

Medicare doesn’t provide benefits for long-term care, so you will need to find another way to pay for long-term care if needed. Options include traditional long-term care insurance policies, government programs for eligible veterans and low-income people, or personal savings.

The Bottom Line

Retirement can be a stressful time financially. As you age, your health-related costs may increase. It is essential to plan for these costs so you and your family can afford your needs during retirement.

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This article originally appeared on Worried About Major Health Expenses in Retirement? How To Prepare Your Finances Now