Healthcare in Retirement: Know Your Options and Plan Ahead for Costs

Healthcare funding is among the most underestimated costs in retirement. Learn about three ways to help plan for costs: Medicare, health savings accounts (HSAs), and long-term care insurance.

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5 min read

Key Takeaways

  • Learn the ins and outs of Medicare, including its limitations, and what you can do to cover any gaps

  • Start early if considering a health savings account (HSA), as once you’re age 65, you can no longer contribute
  • Consider the potential benefits of long-term care insurance and determine whether such a policy is right for you

As you plan your retirement, be sure to consider healthcare costs as part of the equation. The great news is that with advancements in medicine and technology, and an overall focus on mental and physical wellness, the average life expectancy has been increasing. Most people will spend 18 years in retirement, although some healthy individuals may see a retirement of 30 years or more.

While we are enjoying longer lifespans, we also have to face the added costs of healthcare during that time. Early planning can help prepare you to manage these costs effectively.

Whether you’re still saving for the future or transitioning to retirement, consider these typical ways to fund healthcare: Medicare, health savings accounts, and long-term care insurance.

The ABCs (and D): What Is Medicare and Who Is Eligible?

If you’re age 65 or older (or disabled), you’re likely eligible for Medicare, the federal insurance program. There are two basic parts of Medicare, Part A and Part B, but there are a couple add-ons as well: Parts C and D.

Here are some of Medicare’s basic rules and regulations regarding coverage:

Medicare Part A: This provides hospitalization coverage. If you’ve paid into the Social Security pool for at least 10 years, you’ll pay no premiums. There’s no spending cap, although coverage is limited to 90 to 150 days per benefit period. There’s a deductible of $1,340 and the copay is 20% of the service cost. Most people age 65 or older are eligible for Part A if they have worked and paid Medicare taxes long enough. You should sign up for Medicare Part A three months prior to your 65th birthday, whether or not you want to begin receiving retirement benefits. For more on Medicare enrollment, visit the Medicare Benefits page on the Social Security Administration website.

Medicare Part B: Part B provides coverage for doctor visits and other outpatient costs such as medical equipment and physical therapy. It also covers some preventive costs such as diabetes testing, glaucoma screening, and colon and prostate cancer screening. Part B comes with a monthly premium that costs between $134 to $428 depending on your income, and has a deductible of $183 a year. Copay is usually 20% of service costs. This premium is deducted directly from any Social Security payments you receive.

There are gaps in Part A and Part B insurance. It doesn’t cover prolonged hospitalization or long-term care. It also doesn’t cover prescription drug costs, dental care and dentures, or hearing and vision. For those, you’ll need to purchase supplemental insurance.

Medicare Part C: Also known as Medicare Advantage, Part C is the name for supplemental private plans operated through Medicare. These plans help cover some of the gaps between Medicare Part A and Part B. In addition to Part C, some private insurance companies offer supplemental policies (so-called "Medigap" policies) to help pay some of the healthcare costs medicare doesn’t cover, such as copayments, coinsurance, and deductibles. Before making a choice, review advantages drawbacks various plans. for more information, For more information, the Medicare.gov website offers detailed explanation of Medigap and Medicare Part C plans. (Note: some retirees may receive healthcare benefits from a previous employer. If your employer offers retiree benefits, see what kind of supplemental insurance it offers.)

Medicare Part D: The Part D section is for prescription drug coverage. These policies are sold by private insurers. Plans differ, but most purchasers pay a monthly premium for Part D coverage. They may or may not have a small annual deductible. Most plans require an additional fee the enrollee pays for each prescription. This might be assessed as a copayment—a flat fee for each prescription, or coinsurance, or as a percentage of the cost of the drugs.

Action plan: Healthcare costs in retirement can be expensive. When you’re not working, you’ll have limited opportunities to fund these costs. And since Medicare pays only a portion of healthcare expenses, consider increasing contributions now to tax-advantaged or -favored plans/accounts such as a 401(k), IRA, Roth IRA (distributions from Roth can be particularly beneficial in not increasing your Medicare Part B premium), or a health savings account (see below).

Health Savings Accounts (HSAs)

If you have a high-deductible health plan, whether through your employer or purchased on your own via the marketplace, you may be eligible to enroll in an HSA. For the 2018 tax year, a high-deductible plan is defined as having a deductible of at least $1,350 for an individual or $2,700 for a family. There are limits to how much you can shelter. For 2018, individuals can put in up to $3,450, and for families, the maximum amount is $6,900. People over 55 can contribute an additional $1,000. Limits for 2019 have increased to $3,500 for individuals and $7,000 for family coverage.

HSAs can offer a trifecta of tax savings: You can put in pretax contributions; the HSA contributions that are either invested or held in interest-bearing accounts can potentially grow tax-free; and withdrawals to pay for qualified medical expenses are tax free. These withdrawals can be used for copays, deductibles, coinsurance, and other expenses that can help lower your overall healthcare costs. HSA funds roll over annually if you don’t spend them, allowing money to potentially grow tax free. Plus, they’re portable, so if you leave your employer, you can take the funds with you. Just be sure to review the investment options available in the HSA, especially if you plan to use it for longer-term savings. You want to be sure you are investing to overcome the impact of inflation, particularly medical inflation rates. But, all investing involves risk including the possible loss of principal. 

Action plan: Consider enrolling in HSAs while you’re under age 65, as once you’re eligible for Medicare, you can no longer contribute to an HSA. Not many accounts offer this level of tax-free savings, so be sure to see if this can work for you.

What Is Long-Term Care?

Long-term care helps people with their daily personal-care needs, such as walking, eating, and bathing (but it does not include medical care). Medicare doesn’t pay for these needs.

Long-term care insurance can be used for care in multiple places: in-home care, nursing homes, and at assisted living residences.

If you think that long-term care insurance is a good option for you, it might pay to purchase a policy around the age of 50. The sweet spot, most experts recommend, is between 51 and 64, as you approach retirement. Once you turn 65, prices start to rise substantially and you may get less coverage than you would for the same price at a younger age.

According to AARP, the combined annual premium for a 55-year-old couple is $2,100, but for a 65-year-old couple, that jumps to $3,700. Women tend to live longer, so they’ll need care for longer. And, as they are more often the surviving spouse, they are more often the caregivers for their ailing partners. As a result, they can spend a significant amount of their savings providing this care. In that situation, they may benefit from long-term care insurance.

Those premiums can be expensive, but there are alternatives to long-term care insurance. You might consider self-funding long-term care through, for example, a savings account. Or, consider longevity insurance, which can be used to supplement income at later ages to pay for any needs that arise after age 80. This extra income can be used to pay for care directly, or to pay expenses like Medicare premiums.

Action plan: Take time to assess the cost of a long-term healthcare plan in light of your current retirement savings goals and health. That may help you decide whether to self-fund or purchase a policy.   

Keep time on your side by considering all of your options and actively planning to fund healthcare in retirement. Get several estimates on healthcare and policy costs, making sure to consider the impact on both spouses if you are part of a couple. Now might be a good time to review your portfolio with a financial professional to help ensure the goals you’re pursuing are on track.  

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