Health care can become a significant part of your retirement budget. Understanding Medicare costs, out-of-pocket expenses, long-term care and HSA opportunities can help you build a more realistic retirement plan.
At a Glance:
Determining how much money you’ll need to live comfortably after you retire is not an exact science. Your costs can depend on your health, longevity, Medicare coverage, prescription needs, income and where you live. In general, you may need between 70% and 80% of what you were earning during your last working years to maintain the same standard of living in retirement.
However, as you age, you may find that you have to spend more on health care. How expensive could health care costs be in retirement? Very expensive, according to recent data. According to 2024 Bureau of Labor Statistics Data, Consumer Expenditure Survey* shows that average health care expenses for individuals between the ages of 65 and 74 were $7,505 in 2024 and averaged $7,708 for those age 75 and older. Of course, an individual’s personal health and the cost of medical care in the particular location where the individual resides can impact the amount that will be spent.
How You Can Prepare for Healthcare Costs in Retirement
Planning for health care costs in retirement is critically important. Here are some steps that can help.
Estimate Your Personal Health Care Budget
Consider the following when building your retirement budget:
- Current health and family health history
- Prescription medications
- Expected retirement age
- Medicare premiums and supplemental coverage
- Dental, vision and hearing expenses
- Potential long-term care needs
- HSA balances
- Health insurance needs before age 65
- Inflation and longevity
Consider Long-Term Care Insurance
A long-term care insurance policy helps cover the costs of home health aides, nursing home care, and assisted living facilities. If you buy a policy when you are relatively young and healthy, it’s likely the policy premiums will cost less than if you wait until you’re close to retirement. The size of the daily benefit amount you select and the length of time you are willing to wait to receive benefits will also affect the cost of a policy. Long-term care policies can be complex, and different policies cover different benefits, so it can be helpful to work with a professional to find one that meets your needs.
Boost Your Savings Rate
One way to blunt the impact of rising health care costs is to save more. It may be easier said than done, but you should try to maximize your savings, especially if you are at a high risk of chronic conditions because of your current health or because of your family’s medical history.
Even small increases can add up over time. You might consider directing a portion of a raise or bonus toward retirement savings or increasing your contribution percentage each year. If you’re age 50 or older, catch-up contributions may also provide an opportunity to save more in certain retirement accounts.
The goal isn’t simply to save more for health care. It’s to build a retirement plan that accounts for health care alongside your other expenses, income needs and long-term goals.
Consider a Health Savings Account
A health savings account (HSA) is essentially a medical savings account available to those enrolled in a high-deductible health plan (HDHP). It can be used to pay for a variety of health care expenses. A big plus with an HSA is that it offers tax-saving features — contributions are deductible, interest (or earnings) on contributions is tax deferred, and, as long as the medical expenses paid with HSA savings are “qualified” expenses for the individual, spouse, or dependents, HSA withdrawals are tax free.
If your employer offers an HSA, you can contribute to your account from your paycheck at an agreed-on amount. You can invest your HSA contributions in whatever option(s) the plan offers. Money that you do not spend during the year is rolled over for use in subsequent years. If you are in relatively good health, you may be able to accumulate a good-sized HSA balance over the years.
Factor in Medicare
Medicare can help cover many health care expenses in retirement, but it doesn’t cover everything. As you build your retirement budget, it’s important to account for costs you may still be responsible for, including Medicare premiums, deductibles, copays, prescription medications, and services that may not be covered.
Most people become eligible for Medicare at age 65. If you plan to retire before then, consider how you’ll pay for health insurance until Medicare coverage begins. Depending on when you retire, those costs could be an important factor in determining how much you need to save.
It’s also helpful to remember that Medicare generally does not cover most long-term care. Planning separately for potential long-term care expenses can give you a more complete picture of what health care may cost throughout retirement.
As you approach retirement, including estimated Medicare and other health care expenses in your financial plan can help you better understand how much retirement income you may need.
Health care is just one piece of your retirement picture. Your expected retirement age, Social Security, savings, investments, income needs and future health care expenses all work together. Building those pieces into one personalized financial plan can give you a clearer picture of whether you’re on track for the retirement you have in mind.
Wondering if your retirement savings are on track? Talk with an Emerj360 Financial Professional about building a plan around your goals.
Source
*Source: Consumer Expenditure Survey, U.S. Bureau of Labor Statistics, September 2023.
