If you are nearing retirement age, it is important that you do not assume that your savings will cover all of your health care expenses once you are in your retirement years.
The cost for health care after you have reached your early to mid-sixties is likely to be one of the biggest expenses you will have throughout your retirement. Plus, the costs of health care tend to increase as the years go by, so it is likely that if you still have years to go before you retire, you will pay more than what current retirees are paying. Because of how much money you will need to cover your necessary medical treatments and procedures, it is important to plan your health care costs for retirement ahead of time.
There are many different factors that influence the increase in the money retirees are needing to spend on health care today. They include the fact that people are generally living longer and retiring around the age of 62 years, which is a few years before you are even able to enroll in Medicare. Also, health care inflation is continuing to rise even faster than the rate of general inflation. Additionally, while most retirees in previous generations had access to employer- and union-sponsored retirement health benefits, many people do not have access to those benefits anymore.
In 2018, it is expected that an average 65-year-old couple that is retiring will need between $245,000 and $270,000 saved to cover health care expenses and Medicare premiums during their retirement. Of course, the exact amount of money that each individual will need for health care costs can certainly vary quite a bit from person to person. This is due to a number of different factors including how healthy you are when you retire, how long you will live and what age you are when you retire. The costs for various different health procedures and treatments are different in different states as well, so where you live when you retire will also play a part in how much money you will need to have set aside for health-related expenses.
In addition, the amount of money that you will need also depends on what types of accounts you use to pay for your health care in retirement, such as a 401(k) account, a health savings account (HAS), IRA or others. Each of those accounts may have different taxes required that must be considered.
Also, if you are still working and you employer offers the ability for you to participate in an HSA-eligible health plan, you may want to consider participating because of the many tax benefits. An HSA allows you to save pre-tax dollars and possibly even collect employer contributions if they are offered as well. Plus, when it comes time to withdraw your funds, you may be able to withdraw them completely tax free if they are used to pay for certain qualified medical expenses. Utilizing an HSA can be very beneficial when trying to pay for health care during your retirement.
It is simply a fact that health care costs will likely consume a very large portion of your retirement budget, so it is necessary that you understand that fact and plan appropriately. One important component of your plan is determining if and when you will enroll in Medicare. Medicare coverage begins at the age of 65, which means that if you choose to retire before you reach 65 years of age, you will need to use a different form of health insurance coverage before you are eligible for Medicare.
You must also consider the various Medicare options available as well. You will want to research Medicare Parts A, B and D along with the Medicare Advantage program (Part C) and the Medigap supplemental insurance plans to determine what will work best for you. Each plan will have different annual premiums and copays and those amounts will also vary with each different level of supplemental insurance. As with any insurance plan, you may need to estimate approximately how many doctor visits you anticipate you will have within the next year to help you determine what premium and deductible will work best for you.
Other forms of health coverage aside from Medicare may include coverage under a spouse’s health plan if you have a spouse that is still employed, or there are public and private insurance options available as well. Regardless of which type of insurance coverage you opt for, there will be premiums that you will be expected to pay and you must plan for those costs in advance. It is also important to understand that Medicare, along with other types of insurance, does not cover everything so you will also have to plan on paying for some expenses out of pocket.
It is best to be as prepared as possible for the expenses that will come with your health care as you near retirement. To do so, it is advisable to create a few different plans. First, you will need to determine what health insurance coverage you will utilize, and then you will need to plan on how you will pay for any premiums and out of pocket expenses.
One component of your plan should be how you will increase your retirement savings so that you will have enough money available to cover your health care in retirement. If you are older than 50 years of age you may be able to take advantage of catch-up contributions to your IRA or 401(k), or if you are older than 55 years of age, you can earn additional catch-up contributions each year to your HSA. Taking advantage of those extra contributions can be a big help when it comes to building up your retirement savings. Also, simply planning to contribute even a little bit more than you may have originally planned can make a big difference in your savings as well.