Planning for Health Care Expenses in Retirement
Adam Newman, CFA, CFP®, RICP®
When we think of traditional retirement planning advice, a lot of time and attention is focused on answering the foundational questions; Will I run out of money? How should I change my investment portfolio? When should I claim Social Security? While these questions are incredibly important in the context of your overall retirement plan, we’ve found that many retirees overemphasize these topics at the expense of carefully considering one area that has the potential to derail even the most intentional of plans - healthcare expenses.
Managing and planning for medical expenses in retirement is an essential piece of the retirement planning process and potentially involves maneuvering several complicated transitions including pre-Medicare, Medicare enrollment, and accounting for long-term care expenses.
The purpose of this blog post is to provide a better understanding of the unique considerations and questions that should be addressed when incorporating healthcare expenses into your overall retirement plan. Please note there are substantial details involved in each area (many of which we can’t cover in a single blog post) but we hope this serves as a guide for future planning.
The Numbers and the Facts
To fully appreciate the importance of planning for healthcare expenses in retirement we’d like to emphasize some key data points highlighting the concerns retirees need to navigate:
1. Retirees are Living Longer: Thanks to medical advancements and healthier habits, life expectancies have gradually increased over time. In the coming decades Americans are projected to have longer life expectancies and by 2060, life expectancy for the total population is projected to increase by almost seven years, from 78.9 in 2019 to 85.6 in 2060.
2. Healthcare is Getting More Expensive: According to an annual study conducted by Fidelity, a 65-year-old couple retiring in 2022 will spend an average $315,000 in healthcare and medical expenses throughout their retirement. That’s 5% higher than last year and has steadily increased over time, rising 29% from 2014 to 2019 alone. These numbers do not even include long-term care or dental expenses, which can be significant.
The Retirement Timeline and Healthcare Decisions
Planning for healthcare expenses in retirement takes on a non-linear and unpredictable path and involves navigating several important phases. Our retirement timeline was designed to keep retirees aware of the pending decision points throughout retirement, including those related to healthcare.
Here are some key considerations for Pre-Medicare healthcare planning:
- If purchasing insurance through the public marketplace your premiums can be heavily impacted by your household income, so careful tax planning is incredibly important during this window of time.
- Depending on the plan you chose, you may be eligible to continue funding a Health Savings Account (HSA) all the way up to Medicare enrollment. Continuing to fund an HSA can be a fantastic way to build tax-free savings for future health expenses. You’ll also get a tax deduction for contributions into the HSA which can help lower your overall tax bill early in retirement.
- Budgeting for these costs before finalizing the retirement decision is vital. Retiring before understanding your potential overall healthcare expenses can result in substantial unplanned spending or even the need to go back to work full or part-time.
2. Medicare and Medicare Enrollment: Once a retiree turns age 65 they are eligible to enroll in Medicare. The Medicare system was designed to standardize medical care for retirees and has significant benefits but also complexities.
Below are some important considerations when navigating Medicare enrollment:
- Retirees must make sure they enroll in the various parts of Medicare at the correct time in order to avoid lifelong penalties – timing is key
- Retirees must be aware of what Medicare does not cover and budget accordingly. For example, Medicare does not provide coverage for dental care, eye examinations, hearing aids, or custodial long-term care services among other things.
- Make sure to review your Medicare coverage annually during open enrollment and decide whether or not original Medicare (with a supplemental plan) or a comprehensive Medicare Advantage plan makes the most sense. There are important reasons why one option might make more sense than the other. Pay special attention to changing drug prescriptions, doctors, or if moving from one state to another.
- Finally, the retiree must be aware of the tax nuances of Medicare premiums. Premiums for Parts B and D can be significantly more expensive depending on your income. How you manage your investment portfolio and retirement distributions can make a big impact.
TIP: For more details on Medicare check out Medicare & You, which is updated by the government every year and provides important details on all things Medicare
3. Long-Term Care Expenses: Typically needed later in life, long-term care is a broad category that encompasses several areas; custodial care, skilled nursing care, and other healthcare services provided over an extended period of time in various settings such as nursing homes, assisted living, or at home. Some of the more common drivers of needing long-term care include Alzheimer’s, Arthritis, Cancer, and Strokes.
TIP: For those wanting additional information, longtermcare.gov provides some great resources and information.
Here are some key considerations when planning for long-term care:
- Many retirees need help determining whether or not to offset some of these costs through long-term care insurance. Deciding whether or not to purchase and maintain long-term care insurance is one of the most controversial topics in retirement planning. These plans have been around for about 30 years and have evolved significantly. Retirees should evaluate the wide range of available plans and weigh their costs against the other resources they have available to fund potential care.
- A majority of long-term care services are provided at home and by family members. Take time and be intentional about where you might want care provided and if your family is able and willing to help. Planning ahead of time and communicating this plan can alleviate significant stressors if/when the time comes.
- If you decide to “self-insure” potential long-term care costs (meaning you decide to forgo purchasing insurance), make sure to review your financial plan annually and account for potential expenses and what this means for your retirement budget and any legacy you might want to leave for your family. Self-insuring is an acceptable path under the right circumstances but also requires more transparency and stress testing your plan for various potential scenarios.
Planning for healthcare in retirement should be an individualized process that takes into account your unique personal situation. It’s important to avoid generalized advice and review these decisions and considerations annually – it’s never too late to start planning!