Healthcare Costs Are Seniors' Biggest Financial Concern for Retirement, but Few Are Planning for Them

Close your eyes for a minute and imagine your dream retirement. Does the image you conjured involve travel? Spending time with family? Enjoying hobbies or putting your efforts into a cause you care about?

Among the things you probably didn't picture were visits to hospitals, spending time in long-term care facilities, or taking prescription drugs, but those, too, are part of the reality for many retirees, and they carry a big price tag.

The question of whether or not they'll be able to pay for their  healthcare and long-term care is the most common money-related worry among retirees, according to a 2020 Edward Jones survey. Over half of retirees and two-thirds of workers planning to retire within the next decade cited that as a major concern. Yet only 22% said they had actually budgeted for their healthcare and long-term care costs, and fully 68% of workers soon to retire said they had no idea how much they ought to be setting aside for those expenses. 

Doctor talking to older man about medical care

Image source: Getty Images.

Their confusion is understandable. Calculating all retirement expenses requires a healthy dose of estimation, but it's important that you make the effort. The more clearly you understand how much you'll need, the more likely you are to be able to gather those resources, and the less likely you'll be to run out of money prematurely. Here's how to get started.

How to estimate the cost of your retirement healthcare expenses

The average 65-year-old couple retiring in 2020 will need about $295,000 just to cover their retirement healthcare expenses, according to Fidelity -- and the true figure will certainly be higher for some people. The calculations that underlie that number include both Original Medicare and Medicare Part D coverage, but they don't account for long-term care, items not covered by Medicare such as hearing aids, over-the-counter medications, or most dental and vision care services. This figure also assumes an average life expectancy based on Society of Actuaries data, so those who live into their late 90s or 100s will likely spend even more on healthcare.

Then, there are other variables, like how healthy you are in retirement, how expensive medical care is where you live, and whether you decide to purchase supplemental insurance policies to cover what Medicare doesn't. All of this makes it impossible to come up with a single, definitive number that workers should plan on saving to cover their healthcare costs in retirement.

So what are you supposed to do? You can use that $295,000 estimate as a starting point, but you definitely want to add to it, especially if you're a long way from retirement. Over time, medical costs will likely keep rising -- growth in healthcare expenditures has consistently outpaced inflation for decades -- and our average life expectancy could increase, meaning you'll need extra money to cover more years of retirement. If you have a family history of severe illness or believe you're likely to need long-term care at some point (about half of us will), you'll want to budget even more. 

You can look up the average costs of medical expenses now to get a baseline. Then, adjust from there based on your estimates of your life expectancy, relative health in retirement, and inflation. For example, it costs about $6,844 per month on average for a semi-private room in a nursing home. You probably don't want to budget for less than that, but you might want to add even more to your estimate if you're still several decades away from retirement or you live in an expensive area.

Ultimately, it's about what you feel comfortable with. It doesn't hurt to overestimate your retirement healthcare costs -- you can always pass the extra along to your heirs. But if you underestimate, you may wind up having to tap savings you'd intended for other living expenses, which could cause you to run out of money prematurely.

How to save for retirement healthcare costs

While you can't accurately predict how much medical care you'll require as a retiree nor how much it'll cost, you can take steps to make your out-of-pocket costs a little more predictable. You'll probably be on Medicare in retirement, but Medicare doesn't cover everything. Medicare supplement plans are insurance policies that help you cover things the original government-run plan doesn't. They have their own deductibles, premiums, and sometimes copays, but those predictable expenses could be easier to budget for than unpredictable medical bills you have to pay completely out of pocket.

A Medicare Advantage plan is another option. Also known as Medicare Part C, these plans are required to cover everything Original Medicare (Parts A and B) does, and may cover additional services as well.

Those worried about the possibility that they will eventually need help from a caregiver to handle their everyday activities should look into long-term care insurance as well. Such policies specifically cover those costs, which most health insurance policies don't -- but the premiums for them are also quite expensive. You could also consider a life insurance policy with a long-term care rider, which would allow you to tap its value to cover your long-term care if you end up needing it. Buying one of these while you're younger could save you money compared to paying for a long-term care policy when you're older.

You should definitely be saving in a health savings account (HSA) if you're eligible for one and you have some extra cash on hand after putting money away for your other retirement expenses. HSAs are designed to help you cover your medical costs at any age. Money you put into the account reduces your taxable income in the year that you contribute it, just like tax-deferred retirement contributions, and if you withdraw the money to use it for medical expenses, you'll pay no taxes on it at all. You can also use those funds to cover non-medical expenses, though doing so before you turn 65 means you'll incur a 20% penalty, and you'll owe taxes on these withdrawals regardless of age.

Anyone with a high-deductible health insurance plan -- one with a deductible of $1,400 or more for an individual or $2,800 or more for a family -- may contribute to an HSA. Individuals can set aside up to $3,550 in 2020 and families may contribute up to $7,100. Adults 55 and older can add another $1,000 above those limits. 

Some HSAs enable you to invest your funds just like you would with a retirement account, so you can grow your money more quickly. This is definitely worth looking into if it's an option with your HSA. If you don't already have one through your employer, you can open one at a bank or brokerage as long as you meet the criteria above.

Check in with yourself periodically

The difficulties involved in estimating how much you'll need to cover your healthcare costs as a senior is one key reason why retirement planning is never finished. You can make an initial plan now, but as you age, you'll no doubt have to update it periodically based on changes both in healthcare costs and your own health. Schedule annual check-ins with yourself to review where you stand, and adjust your monthly savings amount as needed to keep yourself on track for the retirement you want.

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