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Prepare for Health Care Costs in Retirement

healthcare costs

Most people will tell you that they’ve got plans for their retirement years. They may plan to travel the world or purchase a vacation home. Perhaps they have a passion for a hobby they want to pursue. Whatever their retirement dream, people think about it and plan for it.

Too often, however, those plans get sidetracked by a major expense they overlooked: health care. The costs of a major illness or injury can be devastating to a retirement budget. The best way to prevent such a financial catastrophe is to prepare for it before it happens.

Assuming Medicare Will Cover It

When planning ahead for our golden years, too many of us make the incorrect assumption that Medicare will cover our medical costs. But that’s not how it works.

Medicare actually covers only about 62 percent of the medical expenses of an average senior citizen. That translates to out-of-pocket medical expenses of $4,000 to $6,000 per year for the average senior citizen. That’s not including the cost of long-term care, either.

Routine health care costs can account for a significant portion of your retirement budget. An unexpected major illness or injury can be catastrophic. The best preventative is to hope for the best while preparing for the worst.

Medicare is the default health care system for seniors and certain others in the U.S. Most generally qualify when they reach age 65 or have a qualifying disability. Medicare can, to put it mildly, be confusing.

  • Part A. This covers costs for services provided by hospitals, skilled nursing facilities, hospices and other service providers. If you made enough contributions to the Medicare system during your employment lifetime, you probably won’t have to pay for Part A. You’ll have to meet a deductible, which can change each year.
  • Part B. This is the portion that pays for doctor visits, medical equipment, testing procedures, ambulance services, etc. It generally pays up to 80 percent of the billed cost. You’re required to enroll in Part B if you don’t have an alternative source of coverage, such as private insurance through a spouse’s employment. Part B will require payment of a monthly premium and there will be a deductible attached.
  • Part C (Medicare Advantage.) This portion covers the gaps in the other parts of Medicare. Again, you have to apply for Part C. A Medicare Advantage plan is similar to a private health insurance policy.
  • Part D. This is the prescription drug coverage portion of Medicare. A private insurance company administers it, and your income level determines your monthly premium. You’ll also have to meet a prescription drug deductible.

There are a few other options under Medicare’s umbrella but these are the main portions that most people utilize.

Other Options Available

There are financial tools available that can help with the costs of health care in retirement. Talking with your professional financial adviser should get you details on exactly which options are open to you.

  • Health savings account (HSA). A health saving account is one way to cover the cost of eligible health care expenses. Money invested through an HSA grows tax-free until withdrawn.
  • Annuity. You can invest a portion of your savings into an income annuity to create an income stream that is reliable and won’t fluctuate with the stock market. A lifelong income stream generated by an annuity can help cover expected, and unexpected, health care expenses.
  • Permanent life insurance policy. Certain insurance policies include access to a supplemental cash value when unexpected health care expenses happen. Some policies may offer riders to help offset expenses for chronic or terminal illness, including long-term care.

Controlling Your Health Care Costs

Any steps you can take to reduce the burden of health care costs in retirement can make a difference in your lifestyle during your golden years.

  • Take care of yourself. Improving your overall health is one of the easiest ways to reduce health care costs as you age. Begin now to make healthy food choices, exercise, get plenty of sleep and stay away from known hazards such as smoking or excessive drinking. Avoiding behaviors that contribute to chronic illness later in life can have a major impact on your health care costs down the line.
  • Shop around when possible. Look at your health care with the eye of a consumer, and shop around for the best price when you can. For example, having an MRI done at an outpatient radiology clinic will likely be less expensive than having it done in a hospital.
  • Get preventative screenings. Even with Medicare coverage, you can get access to health screenings for certain illnesses, such as cancer and high cholesterol. Seniors often qualify for low-cost or free flu shots, mammograms and prostate screenings.
  • Cut prescription drug costs. Skipping necessary medications is not an option, but you can cut your costs by asking your doctor for generic versions of medications when they are available. Mail-order drug services are often cheaper than local pharmacies.
  • Plan for long-term care. Hope you never need it, but prepare for it, just in case. If you aren’t prepared for long-term care, it can literally bankrupt you. Whether you’re looking at an assisted living facility or a nursing home, the costs can quickly become astronomical. Talk with your financial adviser about long-term care insurance or establishing a fund to cover unexpected medical costs.

The Bottom Line

Health care costs are going to happen, so any money you can squirrel away before you reach retirement can help reduce the burden you’ll have to bear in the future. Having the foresight to prepare for it means it won’t catch you by surprise one day. To help better ensure you’re financially sound, contact Ross Wealth Advisors today!