It’s no secret that once of the largest expenses for retirees is medical expenses such as Medicare premiums, prescription drugs, doctor visits, etc. But just how much are retirees spending on healthcare?
In a recent study, they found that 12% of the median retiree’s total retirement income went towards medical expenses along with 25% of social security benefits going towards medical expenses as well (1).
According to the Fidelity Retiree health care cost estimate, a single person in 2023 may need around $157,500 to cover health care expenses in retirement while the average retired couple age 65 may need around $315,000 (2).
So, what are the ways to best prepare for these expenses?
1. Health savings accounts:
HSAs can be an extremely effective tool when planning for future healthcare expenses. I frequently get asked if an HSA can be used to pay Medicare premiums. Even though Medicare premiums are paid directly out of your social security benefits, you can withdraw money tax-free from your HSA to reimburse yourself for these expenses and they can be re-imbursed at any time. There’s no time limit to re-imbursing yourself. You’ll just need to keep receipts showing the trail of medical expenses paid. The only caveat here is that you cannot withdraw money from an HSA for medical expenses you incurred before opening the HSA. Due to the triple tax-free nature of the HSA, this account should be considered when thinking about medical expenses in retirement (3).
2. Medicare:
When you approach age 65, I’d recommend taking some time to review and consider all your Medicare options. The sign-up period for Medicare is a 7-month enrollment period beginning 3 months before the month you turn 65.
You’ll need to know about Medicare parts A, B, and D, Medicap supplemental insurance plans, and Medicare Advantage.
At a high level:
- Part A covers care you receive while an inpatient is in a hospital, nursing facility, or hospice.
- Part B covers doctor visits, routine and emergency medical services, and outpatient care.
- Part D provides prescription drug coverage.
- Medigap/Medicare supplements can be offered to supplement existing coverage if enrolled in part A, B, and D.
- Otherwise, you can enroll in Medicare Advantage plans which are all-in-one plans that provide the services covered under Parts A and B and may also cover other services that are not covered under Parts A and B, and D.
Once you enroll, you can still switch Medicare plans as your situation deems necessary. Consulting with a licensed health insurance expert is always advised when considering these decisions.
3. Long-term care insurance:
According to Genworth’s estimates, the median cost of a private room in a nursing home is $330 per day or $10,025 per month in 2024 (4).
Long-term care is used to fund nursing home stays, assisted living, and adult daycare expenses since Medicare and Medigap don’t usually cover these expenses. With a long-term care policy, you pay a premium to an insurance company, and they pay out benefits if you ever need the services covered by the policy.
Before making the decision on whether a long-term care policy is right for you, consider the following with regards to your situation:
- Life expectancy.
- The premiums associated with a long-term care policy.
- Possible costs of a nursing home stay.
- Your goals for your assets after you pass such as leaving a specified amount for children.
- Other assets and sources of income that can be used to cover possible nursing home expenses such as retirement accounts, pensions, real estate, etc.\
4. Retirement accounts and other assets:
Lastly, you can utilize specific assets to fund healthcare expenses as well. Many near retiree/retiree’s plan by budgeting or earmarking a specific amount for healthcare costs. In my opinion, this needs to be done when creating a retirement plan due to the significance of healthcare costs in retiree’s lives. When budgeting or earmarking specific assets for healthcare expenses, tax ramifications need to be considered as well.
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