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How to Save for Healthcare Costs in Retirement

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The cost of healthcare in retirement can be expensive. Health insurance premiums and out-of-pocket expenses can be a burden on the working class after they retire.

A recent survey found that workers are planning to continue working well into their old age. In fact, 61% of those polled said they would rather work and maintain medical coverage than completely lose their employer-sponsored medical aid. The 2019 Employee Wellness Survey by PwC found that Millennials (73%), Gen Xers (70%), and Baby Boomers (61%) alike are worried about healthcare costs in retirement. Delaying their exit from the workforce is a way to help alleviate some of these costs.

Healthcare Costs in Retirement

As you age, your healthcare costs will increase. For example, a healthy 70-year-old retired couple in 2024 can, on average, expect to spend $16,155 a year for healthcare services alone. By the time they’re 85, healthcare will cost them about $34,268 a year. The estimates do not include long-term care costs or expenses related to chronic illness.

Adults with pre-existing medical conditions are at a particular disadvantage in the short term. However, according to a report by HealthView Services Financial, healthy retirees have higher long-term medical costs because they’re likely to live longer.

Medical costs can increase because of inflation, health plan changes to your coverage, and the need for more expensive treatments. Here are some ways to lower retirement healthcare costs.

Maintain a Healthy Lifestyle

One often-overlooked way to help lower your retirement healthcare costs is to take diligent care of yourself. If you stay healthy, then you can avoid day-to-day medical expenses. The difference is retirement health care costs between a very healthy person and an unhealthy person can be staggering.

That’s not all, though. If you have lifestyle diseases like high blood pressure, following your doctor’s instructions can reduce the need for doctors’ visits or medicine. Taking your prescription medication on time, following a balanced diet, and regular exercise can help you keep well into retirement.

Dedicate Annuity Income to Medical Expenses

Another way to save for healthcare costs in retirement is by setting aside income for an annuity to cover out-of-pocket medical expenses. While it may seem counterintuitive, this strategy can decrease medical expenses’ impact on your monthly income. Think of it as your own medical emergency fund.

An annuity is an insurance product that makes monthly payments to you. It’s like a pension that you pay for, and it works as long as you’re alive. Annuities can be useful in retirement because they can supply guaranteed income for as long as you live.

Retirement Health Savings Accounts (HSAs)

Health savings accounts are another way to help save for healthcare costs in retirement. HSAs are designed to help you cover out-of-pocket medical expenses during your golden years.

HSAs work just like a regular savings account, with some key differences. You contribute pre-tax dollars into the HSA and use that money to pay for deductibles, co-payments, or other qualified medical expenses. Any money you don’t spend can be rolled over into the next year, and you can even invest the money that’s left in your account for long-term growth.

Not everyone qualifies for an HSA, though. For example, people who qualify for Medicare can’t contribute to an HSA. So, it’s best to talk with a financial planner before opening one. If your employer offers an HSA, you may want to max out your contribution to take advantage of the tax benefits.

How You Can Use HSA Funds

Once you accumulate HSA savings, there are several ways to spend the money. For example, if you don’t have health insurance after retirement, you can use the money from an HSA account.

You may also use the funds to pay for particular health insurance premiums, including the following:

  • Long-term care
  • Healthcare continuation coverage
  • Medicare
  • Other medical coverage

Project How Health Care Costs Will Impact You

If you don’t have a retirement plan and you are nearing your retirement date, it is time to get to work. Either hire a financial planner to help you build a plan that incorporates health care costs in retirement or use DIY retirement planning software to build your own plan. It is extremely important to budget properly for retirement. Otherwise you might not be able to enjoy your retirement like you want, or even worse, run out of money entirely.

The Bottom Line

It’s important to plan ahead for healthcare costs in retirement. Whether you have a chronic condition or not, try to lower your healthcare costs so they don’t take up too much of your monthly income. There are many ways to save for these costs, including deferring retirement, setting aside money in an annuity or HSA, and taking good care of yourself. Talk with a financial planner to figure out your options and how to best distribute retirement investments for long-term savings.

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