Why Health Care Needs To Be a Big Part of Your Retirement Planning

Health care is a major piece of the retirement planning puzzle, but it’s far from the only consideration you need to make as you look ahead to your golden years.

December 21, 2017
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In case you haven’t noticed, health care is expensive. According to the Henry J. Kaiser Family Foundation, U.S. health care costs rose anywhere from 4.2% to 6.6% between 1991 and 2014, depending on the state surveyed.

Moreover, older Americans generally have higher healthcare costs than younger Americans. This is an inevitable fact of life: Older folks are more likely to develop costly health conditions, such as diabetes, cardiovascular disease, and cancer.

Don’t Rely on Social Security Alone

Social Security is a valuable backstop for retirees who’ve worked long enough to qualify for benefits, but it’s not sufficient to cover the average retiree’s living expenses for 20 to 30 years.

“When using Social Security alone to pay these costs, [a typical retired couple] would need to devote 59% of their total Social Security proceeds during retirement to health care,” writes Gail MarksJarvis, Chicago Tribune columnist.

According to retirement planning professionals, relying on Social Security alone to fund one’s golden years isn’t a sound strategy in the best of times. To help you remain solvent and comfortable no matter what happens during your retirement, you need a diversified retirement investing strategy that accounts for a range of health scenarios.

How Much Does Medicare Cover?

Many retirees and soon-to-be retirees assume that Medicare will cover the bulk of their health care costs in retirement. While there’s a grain of truth to this assumption, it’s not the whole story.

Medicare Part A, the most generous piece of the entitlement, does provide a slew of benefits without any out-of-pocket cost to users. However, Medicare’s other elements aren’t completely free. Medicare Part B cost approximately $120 per month in 2016, with higher premiums for retirees with higher incomes.

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Further, retirees seeking benefits beyond what’s covered by “basic” Medicare need to purchase Medicare Advantage or Medigap coverage plans, also known as Medicare Part C. As you’ll see in this Medicare costs page, Part C premiums vary widely, as do coverages and out-of-pocket expenses (such as coinsurance). If you have a pre-existing condition, or if you’re looking for a Medigap or Medicare Advantage Plan with dental and vision benefits, your Part C premiums and/or out-of-pocket care expenses are likely to be quite high.

How To Account for Health Care Costs in Retirement

Fortune favors the prepared. Just as it’s never too early to begin saving and investing for retirement, it’s never too early to start budgeting for post-retirement health care needs—even if you’re in good health today. Your strategy might include:

  • Contributing to health savings accounts (HSAs) that you can tap after retirement
  • Taking advantage of IRS health care expense deductions to offset the tax consequences of required retirement plan distributions
  • Convert part of your traditional IRA to a Roth before age 65
  • Invest in preventive care and make healthy lifestyle changes to reduce long-term health expenses

Just One Piece of the Puzzle

Health care is a major piece of the retirement planning puzzle, but it’s far from the only consideration you need to make as you look ahead to your golden years. If you’re not planning to downsize, you’ll need to budget for home and lifestyle maintenance. You’ll need to account for expenses related to travel and any new hobbies you might take up. If resources allow, you’ll want to explore the possibility of leaving a lasting legacy—whether that means an inheritance for your children or a generous philanthropic gift for an institution that made a difference in your life.