Fidelity recently published the results of a study that said a 65 year old couple retiring this year would need approximately $260,000 to cover healthcare expenses throughout retirement. That figure includes Medicare premiums, Medicare copayments and deductibles and prescription drug out of pocket expenses. It is important to note that it does not include long-term care costs at home or in a nursing home, over the counter medications, dental or cosmetic work. By golden years, they must have meant you’ll need a lot of gold to get by.
In my financial planning practice, we routinely hear from clients that one of their biggest concerns in retirement, if not their biggest, is the cost of healthcare. Couple that financial concern with the overwhelming uncertainty in the political spectrum on this topic and it is easy to understand why. Becoming a financial burden on their children is usually at the top of the list as well. How do you combat this retiree healthcare challenge? Here are some basic ideas to embrace.
Plan to work until you are eligible for Medicare. Unless you and your spouse have access to affordable healthcare, you should probably plan to work until Medicare eligibility kicks in. I recently had a prospective early retiree in my office and premiums for she and her husband were going to be roughly $2,200 per month, for what I would deem to be a very average set of benefits. Working a bit longer until age 65 has the added advantage of allowing you to avoid depleting your savings for just a bit longer.
Take advantage of Health Savings Accounts (HSA) if they are available to you. These plans are fantastic ways to reserve resources for future healthcare costs. Yes, you need to first be a participant in a High Deductible Health Plan (HDHP), but if you are, this account can be a great way to put away dollars on a tax-deductible basis, invest for the long-term, then use the funds during retirement to pay for qualified medical expenses, allowing the earnings to be distributed tax-free! I really like the investment flexibility of Health Savings Administrators. By investing for the long-term, you are giving up the easy debit card feature today at the doctor’s office, but if you are able to compound some earnings over the long-term, you are giving your retirement spending on healthcare a big boost in the future! Not to mention, you are beating the IRS in the process, always a nice bonus.
Build a Retirement Healthcare Fund yourself. Often, we encourage clients to compartmentalize their savings. For example, many of our clients wish to travel extensively early in retirement, when their health will allow them to do so, with the expectation they will taper that commitment off over time. Rather than budget a hypothetical $10,000 per year for travel each year of retirement, we carve off a portion of their retirement savings, move it to a separate account and use those funds to draw on for travel. Based on the remaining balance, it helps folks make discretionary travel decisions. Now, healthcare is not quite as discretionary. You can still set aside a separate allocation (hopefully in addition to your HSA Plan) that will be used solely for healthcare. When your savings portfolio has a very good year, and maybe other spending was down, you could consider transferring additional dollars to the “Retirement Healthcare Fund” to give yourself additional resources to use down the road. This segmentation of assets can make it easier in some cases to make other decisions on a year-to-year basis, such as whether to make monetary gifts to your adult children, or whether you should continue shopping for material items that you may no longer need.
Take care of yourself! Eat healthier foods, and exercise on a daily basis. Studies constantly show that adding exercise to your daily routine has a positive impact on so many parts of your life, including the amount of money you can save on medical assistance.
The cost of healthcare is pretty correlated with age. They go up together. You will need to be prepared with a strategy as to how you are going to pay for it. Doing nothing is not a plan. It’s that simple.