Managing Healthcare Costs in Retirement

The cost of health care is a common concern for most Americans. For retirees, it’s often their financial priority. A combination of quickly rising health insurance costs and the potential for increased medical needs as you age can make planning for healthcare in retirement complex, unpredictable and therefore, worrisome.

However, there are actions you can take to mitigate your risks, minimize your healthcare costs, and help you enjoy a happy and healthy retirement.

Cause for Concern?

In reality, health care ranks as a lower expense than housing, food and transportation for most individuals during retirement. It’s nonetheless a prominent topic of concern for many retirees. While you can limit spending elsewhere (e.g., downsizing your home, limiting meals out), steeply rising costs in the healthcare sector are out of your control. Likewise, beyond general healthfulness like eating right and exercising your brain and body, so is your health. Indeed, your medical needs are likely to increase as you age. All of these elements fuel unpredictability and a lack of control, causing anxiety and making it hard to plan for healthcare costs in retirement. (For related reading, see: What Will Healthcare Cost After Retirement?)

Plan Realistically

We recommend that everyone engage in long-term financial planning to adequately prepare for retirement. Your planning should take place regularly, and it should be comprehensive in nature and include health care considerations. Because of the complexity of issues involved, the easiest and most effective way to achieve a robust retirement plan is to work with a professional advisor. He or she should consider a variety of factors when collaborating with you on your retirement plans, including:

  • Embedding higher rates of inflation for healthcare costs. It’s wise to assume a higher rate of inflation for health care due to the more rapid rise in medical coverage costs.
  • Modeling numerous scenarios that consider a host of potential life events and what-ifs
  • Adjusting life expectancy to analyze the resilience of your retirement funds across different lifespans
  • Considering different levels and durations of health care. Care costs can vary greatly depending upon the level and length of care you need. Nursing care is the biggest concern for most retirees, with costs ranging between $80,000 and $140,000 per year. At least one modeled scenario should include an extended-care need. (For related reading, see: Taking the Surprise out of Long-Term Care.)

Evaluating the impact of these and other factors helps to develop a financial plan for retirement that can adapt to a variety of potential life transitions, including your changing healthcare needs. Having a strong but versatile plan encourages confidence about your long-term finances and your future.

Insure Adequately or Save More

There are various types of insurance that can help with healthcare costs during retirement, including health insurance, long-term care insurance and dental insurance. If you elect to forego insurance, the alternative is to actively save, setting aside funds in a health savings reserve to cover health-related expenses yourself. 

Long-Term Care (LTC) Insurance

Some nursing care needs are covered by Medicare, but coverage is dependent upon specific criteria and is limited in term. For example:

  • If you’re admitted to the hospital for more than three days (other than for observation), your discharge to a care facility may be covered by Medicare, but unless it’s for rehabilitation purposes, the coverage is short-term.
  • Medicare affords 20 days of 100% coverage for nursing care, then 20% coverage for another 80 days. This means you could be responsible for the other 80% of costs for 80 days, and 100% of costs thereafter (unless you qualify again due to another hospitalization).
  • Medicare provides no coverage at all for assisted living or lower levels of care. (For related reading, see: Limitations of Medicare.)

Long-term care (LTC) insurance is the best way to mitigate such costs. While expensive, it makes sense if you can’t afford these risks, or if you’re unwilling to accept Medicaid (which requires you to deplete your assets). Again, a trusted advisor can help you evaluate coverage elections and to analyze cost-to-benefit coverage (i.e., at what point a policy would pay for itself).

Dental Insurance

Dental costs are another large health expense during retirement. Costs of $10,000-$25,000 are unfortunately not uncommon. You can buy dental insurance, and obtaining coverage in advance of anticipated dental needs is wise, as some policies offer growing coverage over a period of years. However, benefits are often modest, and may be capped at $1,000-$3,000 per year. (For related reading, see: How Retirees Can Pay for the Dentist.)

Health Insurance

For Americans 65 and older, the Medicare health insurance program offers:

  • Medicare Part A – offers hospital coverage, usually premium-free.
  • Medicare Part B – covers medical services (e.g., doctor visits) for a monthly premium.
  • Medicare Parts C & D – run by private insurance companies, these policies offer additional medical coverage and prescription drug coverage at an extra cost.

Employer-Sponsored Healthcare

You may also have access to employer-sponsored group health plans during retirement. These can offer broader coverage and better benefits than Medicare. Your employer might even contribute to the premiums. Always consult your employer’s HR department and/or insurance provider before making any health insurance changes. 

Review Your Healthcare Coverage Every Year

Most individuals sign up for health insurance and retain the same policy year after year. Yet the reality is policies change annually, and so does your health.

Prescription coverage, participating providers, premiums, and other plan details can all change year-to-year. In addition, you may be seeing different doctors or specialists, have a new diagnosis, or need different medication. Finally, when you’re younger, you might be willing to take the risk of a high deductible to lower your monthly premiums. However, as you age, your probability of meeting your deductible increases, perhaps making higher deductible plans an unwise financial choice.

Reviewing your healthcare elections on an annual basis can allow you to gain more economical coverage relative to your current medical needs. Year-end is the best time to address these considerations, due to the number of open enrollment periods.

Being prepared and well-informed is the most effective way to manage healthcare costs during retirement. Just like your annual physical, regularly examining your coverage can ensure economical healthcare coverage by minimizing out-of-pocket expenses, while prudent planning and diligent saving can help define a financially secure path towards a successful retirement.

(For more from this author, see: What Investors Should Know About Target Date Funds.)

 

The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This article is for informational purposes only. The views expressed are those of SageVest Wealth Management and should not be construed as investment advice. All expressions of opinions are subject to change and past performance is no guarantee of future results. SageVest Wealth Management does not render legal, tax, or accounting services. Accordingly, you, your attorneys and your accountants are ultimately responsible for determining the legal, tax and accounting consequences of any suggestions offered herein.

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