How To Plan for Medical Expenses in Retirement

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Healthcare can be one of the biggest expenses a person faces in retirement. A 65-year-old couple retiring in 2020 can expect to spend $295,000 in healthcare and medical expenses throughout retirement. This doesn’t include the additional annual cost of long-term care, which, in 2020 had a median costs of $105,852 for a private room in a nursing home, according to long-term care insurer Genworth.

Despite saving and preparing for retirement their entire working lives, many retirees aren’t mentally or financially prepared for the high cost of medical expenses in retirement. Whether you’re early on in your working career, close to retirement, or already making the transition out of the workforce, it’s important to understand and plan for growing medical costs.

Key Takeaways

  • A 65-year-old newly retired couple in 2020 will need $295,000 for medical expenses in retirement.
  • Medicare may pay for some healthcare spending in retirement but does not fully cover all of it.
  • HSA funds and long-term care insurance can help consumers prepare for these costs.

Fitting Healthcare Into a Retirement Budget

Your overall retirement budget depends on two things: How much money will be coming in each month, and the total cost of your expenses.

Only 51% of adults age 60 and over believe that their retirement savings are on track. On average, those 65 and older spend $4,238 per month. However, Social Security has a maximum monthly benefit of $3,011 for those retiring at full retirement age. It’s important to recognize that Social Security is only meant to supplement retirement savings. The Social Security Administration (SSA) reports that Social Security replaces an average of 40% of pre-retirement income.

How much retirement income to budget for healthcare depends largely on one’s age and overall health. “The healthier we are going into retirement typically means that less money will be allocated toward healthcare expenses,” says Chris Schaefer, head of the retirement plan practice at MV Financial in Bethesda, Maryland. “The other side of that coin is that with a healthier lifestyle, life expectancy will be longer and, therefore, retirees need to plan for a longer time in retirement.”

Only 51% of adults age 60 and over believe that their retirement savings are on track.

What Medicare Covers (and Doesn’t) Cover

Medicare can pay for some healthcare spending in retirement, but with limitations, says Michael Gerstman, founder, financial advisor CEO of Gerstman Financial Group, LLC in Dallas. “For example, without a Part D prescription drug policy, Medicare does not cover medications,” says Gerstman.

Original Medicare, also referred to as Parts A and B, won’t cover dental and vision care but Medicare Advantage plans typically do. Medicare does not cover long-term care.

If you plan to rely on Medicare to help cover medical expenses in retirement, you’ll need to budget for deductibles, premiums, and other out-of-pocket costs. For 2021, the standard deductible for Medicare Part A is $1,484. The standard monthly premium for Part B is $148.50, although some Medicare beneficiaries will pay more. The Part B annual deductible for 2021 is calculated at $203. Plan premiums for Part D vary by income.

Medicare Advantage plans are offered through private insurers who are Medicare-approved. These plans generally cover the same costs that original Medicare does, along with Part D prescription drug coverage. Depending on the insurer and what the policy covers, one could pay less for a Medicare Advantage plan. Some plans may also extend coverage to include costs associated with vision, dental, and hearing. 

Look Beyond Retirement Savings to Pay for Healthcare

Climbing healthcare costs don’t have to drain your nest egg. There are two ways pre-retirees can create a safety net for healthcare spending in retirement.

Health Savings Account

If you’re not yet enrolled in Medicare, you can save money for retirement healthcare costs with a health savings account (HSA). These are available with high-deductible health plans (HDHPs) and offer triple tax advantages:

  • Deductible contributions
  • Tax-deferred growth
  • Tax-free withdrawals for qualified medical expenses

“HSA funds can be used to pay for certain medical premiums, including Medicare premiums and long-term care insurance premiums,” Wilkins says.

Those already in their 50s can still maximize these plans by taking advantage of catch-up contributions and employer contributions. “Individuals 55 or older can make a catch-up contribution of $1,000 per year in addition to the maximum contribution limit,” Wilkins says. “Many employers will contribute cash rewards to an HSA for preventative screenings such as mammograms or annual physicals.”

For 2021, the regular HSA contribution limit is $3,600 for individual coverage and $7,200 for family coverage. These limits apply to both employee and employer contributions combined. (Those enrolled in Medicare can no longer make new contributions to an HSA.)

Long-Term Care Insurance

Purchasing long-term care insurance is another way to fill the gap left by Medicare. This type of policy can pay a monthly benefit toward long-term care for either a specified amount of time (usually between two and five years), or for the remainder of your lifetime. 

Long-term care insurance premiums may not be affordable for everyone. Gerstman says an alternative is buying a life insurance policy that has the option of adding a long-term care insurance rider. “This allows younger people to get ahead in their long-term care planning,” Gerstman says, because the sooner one buys life- or long-term care insurance, the lower the premiums likely would be.

The Bottom Line

Healthcare spending can easily account for a big share of a retirement budget. Estimating those costs and creating a strategy for spending can help preserve more of your retirement assets for other expenses.



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