A couple retiring in 2014 is expected to need $220,000 to cover health care costs in retirement, according to a study by Fidelity Investments. That's a significant sum, and one that demands extra attention while financial planning whether or not a financial advisor is in the picture.

For those nearing retirement this is a huge expenditure to plan for on top of normal living expenses. Rising healthcare costs are forcing retirees to make educated choices regarding their healthcare costs and medical coverage. Healthcare costs are one of the biggest drivers of inflation in retirement. (For more, see: Tips for Managing Inflation in Retirement.)

Medical Costs are Non-Discretionary

Unlike travel or entertainment expenses in retirement, medical expenses are non-discretionary. If you are sick or injured you need treatment. Having adequate reserves and good medical coverage can be the difference between a comfortable retirement and one filled with financial challenges. (For more, see: Fighting the High Costs of Healthcare.)

Understand Coverage Options 

Only 28% of firms with 200 or more employees still offer retirement health care coverage, the Fidelity study found. If you're fortunate enough to have retiree medical via your employer it's important that you understand the costs and the scope of coverage as both might be different for retirees versus active employees. You should also be aware that retiree medical coverage can be canceled or modified by the company over time. (For more, see: What Age for Medicare Eligibility?)

Retiree medical coverage is often integrated with Medicare once you are eligible. Most people are eligible for Medicare at age 65 but you need to understand what Medicare does and does not cover. This in itself is complicated. Many retirees also purchase some sort of Medicare supplement policy to augment their coverage and fill in the gaps. (For more, see: Medigap Insurance: Who Needs It?)

Early Retirement Options

If you retire before you are eligible for Medicare and your employer does not offer retiree medical coverage there are a few options that you can consider:

  • If your spouse is working add yourself to their coverage, if applicable.
  • If you'll be working part time see if your employer offers medical coverage and if you are eligible.
  • Continue your current coverage via COBRA as a temporary measure until you find a more permanent solution. This is often a costly option, though.
  • Find coverage via Healthcare.gov or via a local health insurance broker.
  • Enroll in Medicaid, if eligible.

Consider an HSA

You may be eligible to fund a Health Savings Account (HSA). These are associated with high-deductible medical insurance plans. You contribute on a pre-tax basis and the money in the plan can be used to pay for eligible medical expenses either current or in the future. If you don’t need the money to cover current medical expenses these dollars can be allowed to accumulate and then be used to pay the cost of health insurance or medical expenses in retirement. HSAs are not subject to the “use it or lose it” provisions of plans such as Flexible Spending Accounts (FSAs). (For more, see: Comparing Health Savings and Flexible Spending Accounts.)

Be a Smart Consumer

In today’s healthcare landscape all of us are being forced to be smarter consumers of healthcare. This certainly extends to retirees. 

Part of this is identifying a primary care physician and a local hospital if needed. Ideally both would be in any insurance network that you are covered by.

You need to get in the habit of asking questions about a doctor’s diagnosis, the benefits of any tests or procedures ordered, if there are alternative treatment options and similar questions. Much has been written about the number of unnecessary tests driving up the cost of healthcare so being a proactive consumer of healthcare can have financial benefits for you. (For more, see: Failing Health Could Drain Your Retirement Savings.)

Factor in Healthcare Costs

Many retirement planning software tools entail determining the amount of spending you will be able to support in retirement from all sources. In deciding your target retirement spending amount it is wise to go through and put together a budget for items such as housing, food, travel and other normal expenses. (For more, see: How an Advisor Can Help Cut Your Healthcare Costs.)

It's critical that you take a hard look at what your medical expenses might be and factor these costs into your retirement spending estimate as well.

As you near retirement you should have a better idea of your health situation in terms of ongoing medical needs. Obviously things can change should you suffer a life-changing situation like a heart attack or stroke. You should also have a pretty good gauge on any retiree medical benefits that you may be eligible for by this point. 

Stay as Healthy as You Can

One way to combat rising medical costs in retirement is to stay as healthy as you can. Exercise, eat well and stay busy and active. These are all cited as ways to keep your body and mind healthy.

The Bottom Line

Healthcare costs are a major expense for most retirees. A financially successful retirement plan will include provisions for healthcare costs including plans to secure proper health insurance coverage. It's important that you look at all coverage options especially if you will retire prior to Medicare eligibility and your employer does not offer retiree medical coverage. A failure to take healthcare costs into account and plan accordingly can derail an otherwise solid retirement plan. (For more, see: Healthcare Needs of Retired Couples.)