When most couples retire, they generally don’t have the high cost of healthcare on their minds because, after all, retirement is supposed to be a time to enjoy the perks of life. But all aspects of healthcare—including health insurance—should be on your radar as much as any other budgeted expense because costs can quickly and unexpectedly decimate your retirement savings during the course of retirement, especially if you face a serious medical event.
The average couple retiring in 2018 (each person 65 years old) will need about $280,000 to cover medical and health insurance costs through retirement, according to a study by Fidelity. (1)
Compare that with research showing that the average couple between ages 65 and 74 has about $358,400 in retirement savings. (2) Doing simple math will reveal that you could spend up to 78 percent of your retirement savings on healthcare-related costs depending on how healthy you stay and how proficient you are at budgeting and managing your investments and savings.
By understanding how health insurance affects your retirement years, and with careful planning, it's possible to avoid serious financial impacts and focus on enjoying retirement rather than watching your cherished nest egg dwindle away.
1. Think of health insurance as a retirement strategy
Health insurance—along with your overall health—is one of those aspects of life chock full of uncertainty. On the one hand, the vast majority of us need health insurance, but legislation and employer policies sometimes make it difficult to afford, which is why it should be a part of your retirement planning strategy.
Even if you had adequate coverage from your employer while you were working, you may not have access to same quality benefits after retirement. According to a recent study, (3) only 25 percent of large employers (200 or more workers) offer retiree health coverage, compared with the 40 percent in 1999.
This means there’s a good chance that even if you qualify for Medicare, you will likely still have to shop around for a health insurance policy to supplement it.
2. Take advantage of an HSA if your employer offers it
Many employers that offer their employees high-deductible health plans typically also offer health savings accounts. HSAs can best be thought of as a very low risk way to save for medical emergencies and pay for associated costs, such as premiums and deductibles; but they also offer retirement savings benefits under certain conditions.
For one, you contribute money with pretax dollars, and your invested money grows tax-free. When you use the money for qualified medical expenses, you won’t owe taxes on withdrawals. Second, it’s possible your employer may offer matching contributions, much like with a 401(k) account, and HSAs don’t require mandatory distributions at age 70½, as individual retirement accounts (IRAs) do.
The picture is not all rosy though. In order to maximize the savings potential of an HSA in retirement, you may need to pony up your own funds to pay for a portion of your medical expenses while you are working. If you decide to enroll in Medicare when you turn 65, you’ll be able to withdraw money from your HSA, but you won’t be able to contribute pretax dollars anymore.
In addition, if you use HSA savings for nonqualified medical expenses prior to age 65, you may owe a 20-percent penalty, in addition to any taxes due. At best, an HSA should be viewed as a complement to your long-term savings accounts, not a replacement.
3. Know the ins and outs of Medicare
Make sure you know the ins and outs of Medicare, because even though you may be eligible to enroll in Part A, there is currently a $1,316 deductible, plus coinsurance costs depending on services rendered.
Medicare Part B could cost you an out-of-pocket premium of $134 per month in 2018. (4) Keep in mind that out-of-pocket costs for premiums increase depending on your income. What was once a $250-per-month premium can quickly skyrocket into a $1,000-plus payment for the same coverage.
If you opt for Medicare Parts C and D coverage, which cover certain ancillary services and prescription drugs, respectively, you will likely have to shop around for a plan in your budget. Premiums and deductibles, if any, will vary according to the plan you choose.
As with many products purchased on the open market, such as insurance, premiums are likely to go up due to market pressures. You will need to budget for these increases if they occur.
4. Know your health risk factors and whether insurance covers them
Make an assessment of your health risks if possible, because certain medical conditions cost more to treat than others. To further complicate matters, there is an ongoing debate among legislators and health insurance providers as to whether policies should cover preexisting conditions. In some cases, policies may require a lengthy waiting period before they will pay your claims.
A serious medical condition that requires frequent treatment protocols and/or therapy could be very costly if you are not adequately insured or covered while you are ill. Make sure you read the details of your insurance policy and understand the language. If not, seek the help of a qualified individual to review your health insurance policy.
For example, an emergency appendectomy costs around $55,000 on average. (5) If you do not have adequate coverage, you could wind up putting a major dent in your retirement savings accounts.
5. Prepare for the worst with supplemental health insurance
Most of us are not prepared to consider how to respond to worst-case scenarios following a serious medical event, but as difficult as it may sound, having a financial buffer in the form of a supplemental health insurance policy may cost you upfront, but could be worth it financially.
Consider that the average Medicare Part D policy, (6) which covers prescription drugs, costs about $40 per month, or about $480 per year. Now consider the cost of a popular drug such as Lipitor, which can exceed $200 for a 30-day supply if you are not uninsured. When you take these numbers into account, it becomes a no-brainer to have adequate health insurance coverage to control costs.
Remember that the whole point of retirement is to enjoy your golden years, not to scramble to find the financial resources to cover medical expenses. Use HSAs to your benefit when appropriate, and be sure to shop around when purchasing supplemental insurance, because policies vary widely in price and the services they cover.