Healthcare Costs and Your RetirementSubmitted by Bernhardt Wealth Management on July 27th, 2020
As we work with our clients to create a plan for retirement, we typically emphasize the importance of accurately forecasting the impact of healthcare costs. Let’s face it: as we grow older, the likelihood of increased spending for healthcare rises. Even for those with excellent health, expenses for medications, appliances, and preventative measures to maintain a healthy lifestyle are probably going to go up, not down, as they get older. Hearing aids, orthotics, diagnostic tests, and other medical procedures can be expected to take up more, not less, of the budget as we age, and for those with underlying health concerns, the tab is likely to be higher.
Each year, the Milliman insurance consulting group compiles a forecast of expected costs for medical expenses for those entering retirement. For 2020, the report indicates that a healthy 65-year-old couple entering retirement in 2020 can expect to spend about $351,000, in 2020 dollars, on various healthcare costs during their retirement. This figure includes average premiums and out-of-pocket costs for Medicare Supplement Plan G (covers most out-of-pocket costs for Original Medicare) and standard Medicare Part D (prescription drug) coverage. The projections also assume that the male in the example lives to age 88 and the female lives to age 90. The estimate is down for 2020; in 2019 the projection indicated total costs of $369,000.
Remember, these are average costs. For those going into retirement with known health challenges, expenses are likely to be greater. Also, if retirement is farther out for you, medical cost inflation means the amount you’re likely to spend during retirement is greater. For example, a healthy 45-year old couple is likely to spend $505,000 for healthcare costs in retirement, according to the report. It is important to note that this is an average, which means for people who experience significant health conditions, the numbers will be higher. For people who manage to stay healthy without requiring extensive medical care or hospitalization during their lifetimes, the costs could be much lower. But the average expenses—34% of a couple’s Social Security benefits in their early years of retirement—might come as a shock to some people, and should cause some to revisit their retirement spending assumptions.
What can you do? Well, if you’re participating in a 401(k) plan or other employer-sponsored retirement plan, you might consider boosting your annual contributions in order to ensure a larger pool of resources in retirement. Another great alternative is a health savings account (HSA), which allows you to get tax-free compounding and growth on funds designated for paying qualified healthcare costs. You can roll over balances in your HSA from year to year, and if you withdraw funds from it to pay qualified medical expenses, you’ll pay no taxes on the withdrawals. (Note that to qualify for an HSA, you must be enrolled in a high-deductible health plan—HDHP). HSAs are also subject to maximum annual contributions and minimum deductibles, and they may generally not be used to pay premiums for health coverage.
If you would like more information on projected healthcare costs or anything else associated with planning for retirement, please contact us. And if you’d like to read our recent article on controlling healthcare costs in retirement, please click here.