Planning For Healthcare Expenses In Retirement: Who Foots The Bill? Here's A Hint — Medicare Only Covers Slightly More Than Half

When it comes to covering healthcare expenses in retirement, it’s crucial to have a clear understanding of who will be shouldering the financial burden. For many, the default answer might be “Medicare will pay for it,” but the reality is more nuanced.

Medicare, the federal health insurance program for those age 65 and older, plays a pivotal role in providing coverage. If you’ve ever spotted the abbreviation “FICA,” which stands for Federal Insurance Contributions Act, on your pay stub, you’ve been contributing to Medicare. However, Medicare doesn’t cover everything, and it’s not free. In retirement, you’ll pay Medicare premiums, which can increase over time along with your out-of-pocket expenses. Consequently, relying solely on Medicare may leave you with unexpected costs.

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How much will you need to cover your healthcare expenses? According to financial experts at the Employee Benefit Research Institute (EBRI), Medicare covers less than many people assume, accounting for only about 62% of healthcare costs for beneficiaries age 65 and older. Out-of-pocket spending constitutes 12% of these costs, with private insurance covering 14%. That leaves a significant gap to fill.

To put the numbers into perspective, a 65-year-old man would need $142,000, while a 65-year-old woman would require $159,000 to have a 90% chance of covering their healthcare expenses in retirement. For a couple with median prescription drug expenses, the target amount rises to $296,000. Keep in mind that these figures vary based on factors like retirement age, overall health and access to quality care.

The thought of these expenses can be a little tough to swallow, but there’s no need to despair. There are practical steps and tools available to prepare for the future. It’s essential to take a proactive approach:

Run the numbers: Use cost calculators to estimate your retirement budget. Knowing what you’re up against allows for better planning.

Start saving now: Regardless of your age, saving for retirement is crucial. The earlier you begin, the more financial security you’ll have when healthcare expenses arise.

Invest wisely: While it’s important to save, it’s equally crucial to consider investing as part of your retirement planning. Diversifying your investments can potentially yield higher returns over the long term, helping you grow your nest egg and better cover healthcare costs. Consult a financial adviser or consider low-cost index funds and exchange-traded funds (ETFs) for a well-rounded investment strategy.

Consider healthcare costs in relocation: If you’re open to relocating in retirement, exploring areas with lower healthcare costs can be a savvy move. Some regions offer more affordable medical services, which can significantly impact your overall expenses.

Stay healthy: This might sound like a no-brainer, but adopting a healthy lifestyle can save you a considerable amount in healthcare expenses. Regular exercise, a balanced diet and preventive care can help mitigate the need for costly medical interventions later in life.

Explore part-time work: Retirement doesn’t necessarily mean complete cessation of work. Consider part-time or freelance opportunities to supplement your income in retirement. This extra income can help cover healthcare costs without depleting your savings.

Long-term care insurance: While not for everyone, long-term care insurance can provide a safety net for potential extended medical needs in retirement. Investigate your options and weigh the costs against the potential benefits.

Use health savings accounts (HSAs): If your current health plan is HSA-eligible, take advantage of it. HSAs offer triple tax advantages, allowing you to save on taxes while accumulating funds year-over-year.

HSAs offer several benefits for covering health care expenses in retirement:

• Tax-free withdrawals: Money from your HSA can be used tax-free for healthcare expenses.
• Lower premiums: High-deductible health plans (HDHPs) paired with HSAs can reduce healthcare premiums.
• Investment potential: Well-managed HSAs can be invested in mutual funds, potentially growing your account tax-free over time.
• Portability: Your HSA remains yours, even if you change jobs or retire.
• Covering big expenses: Tax-free HSA withdrawals can be used for Medicare and long-term care premiums.

Even if you can only save a small amount in your HSA now, the tax benefits make it a wise choice. Every contribution counts toward securing your financial future in retirement.