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Health Care Costs in Retirement

Retirement Planning
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A mature couple walks alongside a bicycle after saving for health care costs in retirement.

After housing and transportation, health care is one of the largest expenses to consider in the retirement planning process. While it's difficult to know exactly how much you will need to save for health care costs in retirement, there are some considerations to keep in mind such as how much you might need to pay for insurance premiums. There are also some ways to plan ahead to help reduce medical costs in retirement. Here's some information to consider.

How Much Does Health Care Cost in Retirement?

In 2019, a report found that the total lifetime health care costs, including Medicare premiums, for a healthy 65-year-old couple was expected to be $387,644. While it's impossible to predict the future and how much you will have to pay for health care during your golden years, there are a few factors to consider.

Health Status & Life Expectancy

Healthcare costs are generally lower for healthy Americans than they are for those in poor health. However, with a longer life expectancy, these costs tend to be higher later in life. For example, the aforementioned report from 2019 says that a healthy 55-year-old woman living to her life expectancy of 89 is projected to have $424,875 in lifetime healthcare costs. If she has Type 2 Diabetes, she can expect to live to 80, and her total costs would be significantly lower at $266,163.

Medicare & Insurance Coverage

If you retire before age 65, you'll need to cover your own insurance costs. At age 65, you qualify for Medicare coverage. Most people don't pay a premium for Medicare Part A. The monthly premium for Part B is $144.60 (or higher, depending on your income) in 2021. Keep in mind that co-insurance and deductibles may apply. Depending on your health and other factors, you may also need Medicare supplement insurance.

How Much Do Health Care Premiums Cost in Retirement?

Health care premiums can make up a large portion of your total and ongoing health-related costs in retirement. When planning for retirement, it's a good idea to estimate how much you'll need to spend on premiums, which may include the various parts of Medicare, supplemental insurance, potential co-insurance and deductible costs.

Here are the current Medicare premiums and related costs for 2020:

  • Medicare Part A: Most people don't pay a premium for Part A. If you buy Part A, monthly premiums can be as high as $458.
  • Medicare Part B: The standard premium for Part B in 2021 is $148.50. For 2021, the annual deductible is $203. After you meet the deductible, you typically pay 20% of Medicare-approved costs.
  • Medicare Part C: Also called Medicare Advantage plans, Part C coverage is offered by private insurance companies approved by Medicare. These supplemental insurance costs vary, but the average monthly premium in 2020 was $23. Keep in mind that you must have Part A and Part B to get Part C.
  • Medicare Part D: Costs vary, but the average Part D costs for 2020 were $33 per month. Keep in mind that people with higher incomes pay more for Medicare Part D.

5 Ways to Help Prepare for Health Care Costs in Retirement

Many of the medical costs in retirement are beyond your control. But you can do some things to help make them more affordable. There are at least five ways you can start to prepare for medical costs in retirement: open a health savings account (HSA), add to your retirement savings, use medicare supplement insurance if needed, consider long-term care insurance, and maintain a health lifestyle.

1. Open a Health Savings Account (HSA)

A health savings account (HSA) allows you to save money toward certain qualified health care costs on a pre-tax basis. For the year 2021, you can contribute up to $3,600 for yourself or up to $7,200 for family coverage. Keep in mind that you may only contribute to an HSA if you have a High Deductible Health Plan (HDHP). The minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family.

2. Add to Your Retirement Savings

Since retirement accounts, such as IRAs and 401(k) plans, will likely be major sources of income during retirement, you can help boost this income by maximizing your contributions to these accounts whenever possible. For 2021, the maximum contribution to an IRA is $6,000 ($7,000 if you're 50 or over) and the maximum 401(k) contribution is $19,500 ($26,000 if you're 50 or older).

3. Consider Medicare Supplement Insurance

Medicare supplement insurance is often referred to as a Medigap policy because it helps to fill in the gaps of health costs where Medicare Parts A and B may not be sufficient. This supplemental insurance is offered by private insurers and can cover health care costs, such as Medicare co-payments, co-insurance and deductibles.

4. Consider Long-Term Care Insurance

Long-term care (LTC) insurance can help to reduce health care costs in retirement by helping to cover the cost of a long-term care facility in the event that you need one. If you develop a chronic and disabling condition that requires supervision, LTC insurance can cover nursing home care, home health care or adult day care. Long-term care can be expensive, and an LTC insurance policy can help to reduce your health care costs in retirement if you end up needing this care.

5. Maintain a Healthy Lifestyle

By maintaining a healthy lifestyle, you decrease the odds of needing costly health care. Some of the things you can do that may help you stay healthy in retirement include:

  • Exercising regularly: Getting your blood pumping and improving strength and balance may help to reduce stress and reduce odds of heart disease.
  • Maintaining a healthy diet: Eating right is smart at any age, but a good diet in retirement may be more beneficial for reducing your risk of potential ailments, such as diabetes and heart disease.
  • Socializing: Being around other people can help to keep your mind sharp and help reduce stress from being alone.
  • Limiting alcohol intake: Alcohol in moderation may not be a health risk, but it's a good idea to avoid consuming alcohol excessively.
  • Eliminate tobacco use: By refraining from using tobacco, you may help keep your lungs healthy as you get older.

Bottom Line

Health-related costs are likely one of the biggest expenses you'll have in retirement. While many medical costs and other health care expenses may be unavoidable, planning in advance can help you better manage these costs during retirement. Being aware of health care costs, such as Medicare premiums, co-insurance and deductibles, can help you gain a better idea of how much money you'll need to save for retirement.

Even if you are in retirement now, it's not too late to take advantage of certain strategies to help mitigate your medical costs. If you still need additional information or help, you can speak with a financial professional who is knowledgeable about retirement planning products and services.

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