Along with cake, a pocket watch and a surprise party, retirees face a new reality when it comes to health care costs during their golden years. According to the Kaiser Family Foundation 2017 Health Benefits Survey, only one in four firms offers health insurance to retirees – down from 32 percent a decade ago and 40 percent in 1999.
Medicare premiums, deductibles and out-of-pocket expenses – even if you’re relatively healthy – may be more than many people realize. The Employee Benefit Research Institute reports that the average retiree will likely incur nearly $265,000 in out-of-pocket health care expenses in retirement. And yes, the amount doubles for a couple.
What’s Your Plan?
With figures like this, one can easily see how enjoying retirement may seem distant, and how much may be necessary just for the essentials of health care. As you formulate your retirement plan, include health care as one of the items to consider, in addition to travel, hobbies and spending time with family and friends. The following strategies can help mitigate the impact of rising health care expenses.
Practice Prevention
An ounce of prevention is worth a pound of cure. Preventing health care issues can be one of the best ways to keep costs under control. Many could benefit from a few less pounds to save wear and tear on our bodies. Strapping on some sneakers and taking advantage of a fitness regimen has not only physical, but mental benefits. Lastly, many employers offer incentives for healthy behaviors in the form of lower health-insurance premiums, gym memberships and discounted classes.
Make Smart Strategies
No one has the benefit of hindsight, but if you’re younger and/or relatively healthy, it may make sense to select a higher-deductible health care plan and pocket the savings. Money saved could augment traditional retirement savings vehicles, such as a 401(k) or Roth IRA. By selecting a lower cost plan that results in a monthly savings of $100, and investing that savings at five percent, this could add another $153,000 to your nest egg over a 40-year career.
Plus, if you select a qualifying high-deductible plan, you may be eligible to fund a Health Savings Account (HSA). These accounts allow for pre-tax contributions, tax-deferred growth and tax-free distributions for qualified health care expenses. More on that later.
Be a Smart Consumer
While many of us comparison shop for items in stores or on online sites, few think to apply that penny-wise behavior to health care. Sites such as Healthcare Bluebook and insurer websites allow consumers to comparison shop for drugs and tests. Many sites offer tools to upload receipts and payment history to track your health care spending dollars.
Be Smart with Taxes
Making good decisions on where to save for retirement and lessening the impact of taxes can help ensure your retirement funds last longer. Taking advantage of a Roth 401(k), Roth IRA or an HSA where available can help provide a tax-diversified income stream. Using that HSA you set up in your working career can help cover out-of-pocket expenses in retirement that Medicare will not. Additionally, an HSA can be used to pay for dental, vision and hearing expenses, which may not be covered by Medicare. Be aware of your household income level to help avoid larger Medicare premiums.
Earmark Future Income for Health Care
When planning for income in retirement, consider health care expenses. As you consider your sustainable withdrawal rate on investment accounts, many retirees like to match up income streams, including guaranteed income, to fund recurring expenses, such as basic living expenses and insurance premiums. The need for an emergency fund does not go away in retirement either. A “health emergency fund” can help offset those nonrecurring expenses.
My motto has always been “expect the best, but plan for the worst.” Be aware that the decisions you make today may have long-term consequences. Take simple steps today to start planning for a healthy (and wealthy!) future.
This discussion is general in nature and not intended to be used as investment or tax advice. The author based his article on his understanding of present federal income tax and health insurance laws. These laws are subject to change and reinterpretation.
