How to Plan for Medical Expenses in Retirement

A 65-year-old newly retired couple will need $285,000 for medical expenses. Here's how to plan for these expenses.

Healthcare can be one of the biggest expenses in retirement. According to Fidelity Investments, a 65-year-old newly retired couple will need $285,000 for medical expenses. That doesn’t include the additional annual cost of long-term care, which in 2018 ranged from $18,720 for adult day care services to $100,375 for a private room in a nursing home, according to Genworth, a long-term care insurer.

Despite saving and preparing for retirement their entire lives, many retirees aren't mentally or financially prepared for these expenses. A survey by HSA Bank found that 67% of adults 65 and older believed they’d need less than $100,000 for healthcare. “Retirees, in addition to most consumers, seem to underestimate how much they will need for health expenses in retirement, including premium and out-of-pocket costs,” says Chad Wilkins, president of HSA Bank. In fact, Fidelity calculated that males 65 and older will need $133,000 — and females, $147,000 — to pay for healthcare in retirement.

Climbing healthcare costs don’t have to drain a nest egg. There are two ways pre-retirees can create a safety net for healthcare spending in retirement.

The first is with a Health Savings Account (HSA). These are available with high-deductible health plans and offer triple tax advantages: deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses.

Purchasing long-term care insurance is another way to fill the gap left by Medicare. This type of policy can pay a monthly benefit toward long-term care for a period of two years or more. That can help avoid spending assets to qualify for Medicaid, which does pay for long-term care. However, long-term care insurance premiums may not be affordable for everyone. An alternative is buying a life insurance policy that has the option of adding a long-term care insurance rider.

Obviously, this is a complicated issue that cannot be completely dealt with in an email newsletter. We encourage you to read this article and then contact us to discuss the comprehensive financial planning available to our clients.