How to Plan for the High Cost of Health Care in Retirement

When you’re planning your retirement budget, you want to think of all the fun things you’ll do — the trips, the golf, the spoiling of grandchildren. But as you dream of the bucket-list golf courses you’ll visit, it’s also important to balance your fun spending with necessary costs so that you’ll be confident you can afford those plane tickets and greens fees without missing a beat. 

On the not-as-much fun — but still critical — planning list, the cost of health care. And it’s no secret that health care isn’t likely to be a small line item in your retirement budget. So, where do you begin? Don’t worry, we’ve got you covered with a few things you can do now to help you plan for the high cost of health care in retirement. 

KNOW THE INS AND OUTS OF MEDICARE 

There’s more to planning for health care in retirement than knowing the average cost. You also need to understand Medicare since everyone needs to file for it when they’re 65. You might be looking forward to kissing your health insurance plan goodbye, but often people underestimate how much Medicare costs — and overestimate what it covers. Here are the Medicare costs you should anticipate when planning for the high cost of health care in retirement:  

• Medicare Part A: Let’s start with the good news. This part of Medicare, which covers hospital visits, doesn’t require a premium, assuming you paid Medicare taxes while working (if not, it can cost up to $437 per month).  

• Medicare Part B: This part, which covers doctor’s services and outpatient care, will run you $135.50 to $460.50 a month depending on your income. You’ll also owe copays and some out-of-pocket expenses on top of your regular monthly cost.  

• Medicare Part C: More widely known as Medicare Advantage, these are Medicare health plans offered by private companies that contract with Medicare that can cover parts A, B and often D, plus other benefits such as vision, hearing and dental, which parts A and B don’t cover. Benefits and costs vary by state.  

• Medicare Part D: These plans help cover prescription drugs and can be purchased as a stand-alone plan if you don’t choose a Medicare Advantage plan, or if the one you select doesn’t include drug coverage. 

If you’d like to get a head start on comparing plans, the Medicare website has a number of helpful interactive features. 

CONTRIBUTE TO A HEALTH SAVINGS ACCOUNT (HSA) 

A savvy, tax-advantaged way to plan for the high cost of health care in retirement is by funding a health savings account (HSA). These accounts are available to those who have a high-deductible health plan (HDHP), defined by the IRS as a health plan with a deductible of at least $1,350 for an individual or $2,700 for a family, in 2020, those numbers increase to $1,400 and $2,800, respectively. To qualify for the HSA, the HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments and coinsurance) can’t be more than $6,750 for an individual or $13,500 for a family, excluding out-of-network services. In 2020, those numbers increase to $6,900 and $13,800. 

If eligible, you can contribute pre-tax dollars — up to $3,500 for single coverage or up to $7,000 for family coverage — to use for qualified medical expenses. In 2020, those contribution limits respectively rise to $3,550 and $7,100. If you are 55 or older anytime in 2019, you can contribute an additional $1,000. 

HSAs are a fantastic tax-advantaged saving option, particularly if you have already maxed out your allowable contributions in other areas like your 401(k). The funds roll over, and there are no requirements for when you use them. This means you can save up a nice nest egg to use for health care costs in retirement — although note that once you are enrolled in Medicare, you can no longer contribute to an HSA.

RELATED CONTENT: How much do I need for retirement? Our retirement planning guide can help you better understand the road to retirement — and how to craft a financial plan that’s built around your unique goals.

PLAN FOR LONG-TERM CARE 

No one likes to confront the realities of aging, but half of adults aged 65 and over will need help with at least two or more “activities of daily living,” such as eating, dressing and hygiene at some point. However, according to a Northwestern Mutual study, almost three-quarters of respondents hadn’t yet planned for their own long-term care needs. Now’s the time, as the costs can be daunting: While average lifetime long-term care costs are $138,000, that number jumps to $182,000 for females — and 15 percent can expect to spend more than $250,000. 

While the bulk of caregiving has historically been undertaken by family members, those numbers are shrinking due to smaller families, many of whom live farther away. That leaves many retirees relying on paid caregiving. Of course, there’s no crystal ball that will show you exactly what your health situation will be, which can make planning for the high cost of health care in retirement even more daunting. But here are some ballpark figures that might help you estimate various types of health care include:  

• Home care: A home health aide averages just under $23 an hour, but that jumps to $139 an hour for a registered nurse or $131 per visit for a licensed practical nurse. 

• Assisted living facilities: Ideal for someone who wants a little extra help with cooking, housekeeping and laundry, these facilities range from a monthly average of $4,027 for a studio, to $4,560 for a one-bedroom and $4,816 for a two-bedroom unit. 

• Nursing homes: Designed for those who need round-the-clock assistance, a nursing home can run about $89,000 to $103,000 a year for a semi-private or private room respectively.  

For more accurate numbers, check out the Long-Term Care Cost Calculator that takes your location into account.  

As these numbers indicate, planning for the high cost of health care in retirement is not something to be taken lightly. But being aware of the potential costs allows you to create a solid plan that can help free you to spend money on the things most important to you while knowing that you have the important costs covered.