Planning for healthcare costs in retirement


Your retirement expenses will depend largely on your retirement lifestyle. They may be higher or lower depending, for example on how much travel you plan to do and what hobbies and other activities you have. But there’s one expense that most retirees have to account for, and it’s a big one: healthcare.

Healthcare costs are rising significantly faster than inflation. According to a White House report “Trends in Health Care and the Role of The Affordable Care Act,” the average annual increase in health costs was 4.5 percent from 1965 to 2010. According to Fidelity in 2015 a typical 65-year-old couple that will live until their mid-80s should plan on spending $245,000 (in 2015 dollars) on healthcare. That’s $115,000 for the husband and $130,000 for the wife (who will typically live somewhat longer and therefore spend a little more on healthcare). It’s helpful to plan ahead for these costs.

Know something about Medicare

Medicare currently pays only about 60 percent of an individual’s total healthcare costs, according to the Employee Benefits Research Institute. And it’s likely that percentage will decrease in the future. But since most people 65 and over use Medicare, and you probably will too, it’s useful to know the basics. In particular, you might want to know what programs are offered so you can decide which are best for your situation. You will also want to know what services, such as long-term care, are not covered.

Estimate your healthcare costs

Although this is a big unknown, there are online tools such as AARP’s Health Care Costs Calculator that can give you an idea, based on your family history and your personal health history and lifestyle.

Review your options

If you currently have health benefits through your employer, ask whether that continues after retirement. If not, you will want to look into private insurance options to cover you until Medicare eligibility. There may be group policies through clubs, retiree organizations, or professional associations that you belong to. You may also be able to get health insurance through a part-time job. Also, you will want to look into Medicare supplemental policies to cover necessary costs that Medicare does not cover.

For people who have high deductible health insurance plans, there is an additional option: a health savings account. Your contributions to a HAS are tax-deductible, it grows tax-free, and you can withdraw it tax-free for allowed medical costs, including Medicare premiums. Although some people have HSA balances in the hundred of thousands of dollars, the average HSA at the end of 2014 had just $1,933.

You will also want to account for healthcare costs in your retirement savings plan. Like other retirement expenses, you will not need the entire amount upfront. But you can budget for the annual out of pocket costs each year and ensure you have a means of paying for it. The average annual out-of-pocket healthcare cost in 2011 for a 65-year-old in good health and on Medicare was $4,450.

Cultivate healthy habits

One obvious way to minimize your healthcare costs (and maximize your life expectancy) is to cultivate healthy eating and physical activity practices. Just a little exercise on a consistent basis, combined with an overall healthy diet, can go a long way to helping ensure you have a satisfying retirement.

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