How Retirees Can Save for Medical Expenses
According to Fidelity, health care costs for couples who planned to retire in 2015 will rise to an estimated $245,000 throughout retirement.
Just 10 years ago, this figure was $190,000 a year, but people are living longer and the cost of health care continues to rise.
The average American will live until nearly 79-years old. If someone retires at 65, that means he or she will need almost 15 years of retirement savings.
Though Fidelity’s estimate takes into account Medicare enrollment, the $245,000 figure does not include the cost of a nursing home or long-term care. Most people can’t afford to shoulder this financial burden, and when you add on normal living costs like a mortgage, groceries and transportation expenses, this amount seems insurmountable.
Saving for health expenses in retirement is a long road, and it’s very difficult for savings to keep pace with the increases in medical care. Still, there are several things you can do to make saving for health care costs a little easier. Here are four tips:
Max Out to Your HSA
HSA, or health savings accounts, offer families the ability to put away pre-tax dollars to use for all things health care. These accounts aren’t the “use it or lose it” type. The healthier you are in the years preceding retirement, the more you can save in your HSA to use in retirement.
You can use the pre-tax dollars you save in an HSA for any medical costs during the year, and you can withdraw the money tax-free for this qualified expense. For 2016, the IRS has set a contribution limit of $3,350 for individuals and $6,750 for families, meaning you can contribute up to this amount in a given year. Though you cannot contribute to an HSA once you enroll in Medicare, anything you’ve saved before your enrollment can be used for out-of-pocket health care costs. If you’re approaching 65 and plan to retire soon, contribute as much as you can to your HSA now. However, it’s best to start early. Saving up to the maximum limit during your working years can give you a solid nest egg for retirement.
Consider a Medigap or Medicare Advantage Plan
Medicare currently covers about 62 percent of an individual’s medical expenses, according to the Employee Benefits Research Institute.
But that leaves you with 38 percent of the costs. Consider a Medigap policy, which is private insurance that helps people pay for some of the costs not covered by Medicare. The ability to buy a Medigap policy varies by state, as some states require medical exams while others don’t. If you’ve opted not to get Medicare Part D, which covers prescriptions, you can supplement it with a Medigap policy and prescription drug coverage.
A Medicare Advantage plan is another option to fill gaps in Medicare coverage. These plans give you all of your Medicare Part A and Part B benefits (hospital and medical insurance) through a private provider. Most Medicare Advantage plans also offer prescription drug coverage, so this is a good option for retirees who need a comprehensive health insurance plan. If you’re healthy or are fine with only visiting in-network doctors, your premiums may be lower with these plans — an important consideration for retirees looking to cut health care costs.
Sign up for a Part F Plan
Plan on buying a “Cadillac” plan from a Medicare supplement provider. These Medigap plans, typically called “F” plans by most insurance carriers, are the most expensive in terms of premiums but cover the most health care costs in retirement. Benefits include no co-payments, no coinsurance to share the cost of health care with your provider and no deductible before your coverage kicks in. Some “F” plans also cover one year of additional hospitalization at no additional cost. If for some reason have a long-term illness during retirement, this added benefit could save you and your family thousands of dollars.
Put Away Health Care Savings for the Future
While working, look for insurance plans that offer a “vitality” program. These are essentially refunded or discounted premiums based on a health program meant to maintain a healthy lifestyle. Take the difference you would have otherwise paid toward the premium and put it away in savings or your 401k. These dollars can add up to help cover your health care costs in retirement.
Most of your retirement savings will be spent on health care, but you can prepare for this eventuality by saving as much as you can while you’re still employed. Open an HSA and fund it to the maximum amount, shop around for an affordable health care plan so that you can pocket any savings you get for medical costs in your later years, and consider a supplemental insurance plan if Medicare doesn’t cover all your necessary expenses. Taking these steps will reduce the stress and costs of health care in your golden years.