Planning For Healthcare Costs In Retirement

Planning for Healthcare Costs in Retirement is a Personalized Process

Updated on Mar 20 2019


Healthcare is one of the most expensive parts of retirement and there’s no one-size-fits-all plan. When it comes to planning for healthcare and medical expenses in retirement, it’s important to be diligent in planning for costs based on your unique needs.

Learn more about budgeting for healthcare in retirement and how you can proactively plan for healthcare costs in retirement.

Understanding Health Care Costs

Recent data from Fidelity Investments found that a couple who retired in 2017 should expect to spend an average of $275,000 in healthcare costs throughout retirement. As corporate pensions evaporate, company-paid healthcare disappears, and once assured Social Security is threatened, retirees will need to take a more active approach in healthcare savings.

Vanguard, in partnership with Mercer Health, recently developed a framework for helping those about to retire and retirees understand the effects of health care costs in retirement. The paper, “Planning for Healthcare Costs in Retirement” outlines key considerations and encourages thinking through personal aspects of planning for health care expenses.

Jean Young, co-author and senior research associate in the Vanguard Center for Investor Research says, “Most analyses available in the marketplace today point to a daunting out-of-pocket healthcare expense over the lifetime of a retiree. These large dollar values can be demotivating for investors from a psychological and behavioral perspective. Instead, our model focuses on the more manageable task of planning for incremental, annual healthcare costs, while separately considering and integrating the potential for long-term care expenses.”

Even though health care costs are often unexpected and expensive, taking a personalized approach to savings can help retirees prepare for health care costs in retirement. Connecting with an expert financial advisor can help determine how to plan for future healthcare costs without it being overwhelming.

5 Tips for Taking a Personalized Approach to Retirement

1. Make informed coverage decisions.

When planning for healthcare costs in retirement, it’s important to understand how personal factors affect annual healthcare costs. Factors such as marital status, retirement age, and income can all impact coverage needs and costs. Ask questions and work with financial experts to estimate how much coverage you will need in retirement - and how much it will cost.

2. Prepare for loss of employer subsidies.

Account for any employer subsidies that currently exist when calculating healthcare costs in retirement. Understanding the true cost of healthcare and how much your current employer is covering can help retirees better prepare for out-of-pocket healthcare expenses through retirement.

3. Prepare for higher rates in retirement.

After retirement, some people may see a large change in healthcare costs as a result of declining health or the loss of employer subsidies. Consider saving at a higher rate now to cover the rising cost of healthcare.

4. Create a health savings account.

Health savings accounts (HSAs) are a tax-efficient way to save for unexpected health care expenses in retirement. Investing in an HSA today can reduce the impact of health care costs down the road by having money set aside in tax-free savings.

5. Consider Medicare enrollment options.

Know all of your options when choosing Medicare coverage and revisit your options regularly. Choosing between traditional coverage, traditional coverage with a supplement, or Medicare Advantage are dependent on each retiree’s unique circumstances and needs. When making these decisions, know that there may be limits when it comes to making adjustments, and stay within the deadlines to make the best decisions in a timely manner.

6. Budget for long-term care costs separately.

Long-term care costs can be substantial and the Vanguard report found that 15 percent of retirees could experience long-term care costs exceeding $250,000. The report encourages retirees to take a separate approach to long-term planning and to consider relying on friends and family for caregiving needs while taking full advantage of Medicaid.

Are you concerned about budgeting for unexpected medical costs in retirement? Connect with a fiduciary financial advisor to conduct a financial health checkup and walk through your options to develop a healthcare savings plan that works for your personal needs.

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