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Retirement: Surprising Cost of Healthcare

Retirement: Surprising Cost of Healthcare

September 22, 2016
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Sometimes as we think of moving out of the workforce into retirement, we think that we won't need much to live on. It's easy to be wrong, especially when it comes to health care costs.

Recent studies show that retirees will need $130,000 each just to cover out of pocket expenses of health care. This is in addition to coverage by Medicare. Today's 65-year-olds can expect to spend an average of $130,000 on health care during their retirement, from premiums to co-payments to eyeglasses, according to new estimates by Fidelity Investments. Retirement: Surprising Cost of Healthcare The average single 65-year-old woman can expect to need $135,000 to spend on health care in retirement, while a man will spend $125,000, according to the company. (The difference is because the woman is expected to live longer—an additional 22 years, vs. 20 years more for the man.) Fidelity's estimates, based on an analysis of Medicare's claims database and trends in survey data, assume that retirees are eligible for Medicare and try to capture all the costs it doesn't cover—including premiums, co-payments, and things Medicare doesn't pay for, such as hearing and vision exams. But the estimates are only averages, and people's costs can vary widely, according to where they live and how healthy they are. Retirement: Surprising Cost of Healthcare The estimates also don't include long-term care, the sometimes-astronomical costs of home health care or nursing homes that aren't covered by Medicare. Long-term care insurance is available but expensive; although premiums vary greatly, Fidelity estimated that a retired couple would need to pay an additional $130,000 for a policy offering an inflation-adjusted $8,000 per month for long-term care over three years. (It did not examine the cost of a policy for a single person.)

Strategies for Saving for Healthcare

For many Americans, $260,000 may seem an impossible amount to save on top of other retirement expenses, but financial planners say several strategies can help. First, get the right Medicare supplemental insurance policies. The program is complicated, and retirees may need help from an expert or an organization such as AARP to get it right. Second, save for health care in a tax-efficient way. If your employer provides a high-deductible health insurance policy, you're eligible for a health savings account. Workers can contribute to HSAs with pre-tax money, providing an immediate tax break, and let the money compound over many years. Any withdrawals used for health care aren't taxed. Even those without HSAs can deduct medical expenses on their taxes if the costs add up to more than 10 percent of their adjusted gross incomes. (For taxpayers 65 and over, the threshold this year is 7.5 percent.) Third, consider creative strategies to maximize income late in life, when health-care costs tend to rise. By waiting until they're 70 to take Social Security benefits, retirees reap bigger benefits—76 percent higher than if they had taken them at age 62.

If you want some truly independent advice on managing your health care costs in retirement, set a time for us to talk HERE. I am always happy to meet new people. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.