Helping clients plan their financial freedom requires a serious look at the impact of healthcare costs. The fact is, as we age, we increase our chances that we will spend more on healthcare-related expenses. It is not just for treating ailments but the costs of staying healthy and active can add up quickly too. Hearing aids, glasses, orthotics, routine tests, and other procedures contribute to a growing line item in your budget even if you are healthy. And if you happen to have underlying health issues or chronic conditions, you can easily bust your budget.
Every year, the Milliman insurance group produces a forecast of projected costs for medical expenses. The 2020 report estimates that a healthy 65-year-old couple beginning retirement this year will spend approximately $351,000, in 2020 dollars, on a variety of medial related costs throughout their retirement. Included in this estimate are the average premiums plus out-of-pocket costs for Medicare Supplement Plan G and Medicare Part D (prescription drug) coverage. The life expectancy assumption is the male living to age 88 and the female living to 90. The silver lining to such a large projected expense is that this figure is down from the 2019 projection of $369,000.
It is important to understand that these are averages. For people entering retirement with chronic underlying health issues, medical expenses will be higher. And for those with a few years to go before retirement, the inflation on medical costs will require that you prepare a larger healthcare budget. For example, couple in their mid-forties in good health is projected to exceed $500,000 for healthcare costs in retirement according to the report.
How can you prepare? First, take your health seriously as an ounce of prevention is worth a pound of cure. Second, be sure to maximize your contributions to retirement plans such as 401(k) plans, to increase your available resources in retirement. Third, participate in a health savings account (HSA), which allows for tax-free growth of your funds. You are not required to spend the balance each year which allows you to accumulate funds in your HSA year over year. Withdrawals from an HSA used for qualified medical expenses are tax free. (Note that to qualify for an HSA, you must be enrolled in a high-deductible health plan—HDHP).
For more information about planning for healthcare costs in retirement, please contact us.