Retirement Planning: Healthcare Strategies to Consider Now

While preparing for your golden years, you may put away money for food, shelter, transportation, and medical care. You save about 15% of your income and plan to use less than 4% each year.

Even if you’ve been diligent about putting away money for retirement, you may need to save more. According to a new analysis by Boston College’s Center for Retirement Studies, medical costs comprised a sizable chunk of seniors’ savings and Social Security benefits.

Following, we’ll examine how much of a retiree’s salary goes toward healthcare bills and how you can ensure you’re financially stable in old age.

Healthcare costs after retirement

To determine how the percentage of retirees’ Social Security benefits and overall retirement income went toward medical-related expenses like Medicare premiums, prescription medicines, surgeries, and doctor visits, researchers analyzed data from the 2018 Health and Retirement Survey. Contrary to popular belief, Medicare recipients’ medical prices did not go down.

Researchers showed that in 2018, retirees spent an average of 12% of their total retirement income on healthcare. The typical retiree spent 25% of their Social Security check on healthcare, and the most significant portion of the median retiree’s $4,311 medical budget went toward Medicare premiums.

As of 2024, the monthly premium for Medicare Part B (medical insurance) was $170.10.

The average 65-year-old retired couple may anticipate spending about $315,000 on health care in retirement, as reported by the 2024 Fidelity Retiree Health Care Cost Estimate.

Medical costs in retirement: how to save for the future

So, how can you effectively plan for these medical bills in advance if you are approaching retirement? Healthcare costs can be covered in several ways, including using tax-favored accounts and insurance products.

401(k)s and Individual Retirement Accounts

It would help if you prioritized making the most of your 401(k) or another employer-sponsored retirement plan and any standard or Roth IRAs you may have. Taxes are deferred on contributions to a standard IRA or 401(k) until the funds are withdrawn in retirement. As taxes are paid upfront with a Roth IRA, investment gains are not subject to taxation in the future.

Insurance Prepayment Accounts / Health Saving Accounts (HSA)

Consider opening a Health Savings Account, a type of tax-sheltered investment account that may be used to pay medical bills if enrolled in a high-deductible health insurance plan.

In 2024, the maximum annual contribution was $3,650 for single individuals and $7,300 for families. Those 55 and older can make annual $1,000 catch-up payments. It’s important to remember that unused savings from one year will carry over into the following.

In general, there are three significant tax benefits to Health Savings Accounts. Your total taxable income will go down because your contributions are tax-deductible. Not only will your contributions be fully tax deductible, but you will also avoid potential penalties.

Afterward, you can use your HSA to pay for co-payments, deductibles, insurance premiums, and even menstruation products. After you turn 65, your HSA can be used for anything, not only healthcare costs you can’t avoid.

Further, you can avoid paying taxes on your investment profits by doing so.

HSA money can be invested in ETFs, mutual funds, and equities, just like a regular or Roth IRA. Before investing money from your Health Savings Account, check the terms of your HSA to see if there is a minimum balance requirement.

Caregiving and Medicare Supplement Insurance

You may want to consider Medigap, a Medicare supplement policy if your out-of-pocket healthcare expenses in retirement are substantial even after Medicare coverage.

Private insurance companies offer Medigap policies to fill the financial gap left by Medicare’s out-of-pocket costs. Participants must be 65 or older and registered in Medicare Part A (hospital insurance) and Part B (medical insurance). Medigap is supplemental insurance for people with Medicare Parts A and B and is paying their payments.

Long-term care insurance is another option; it pays for nursing home care, assisted living, and adult day care. Because these costs are typically not covered by Medicare or Medigap, it may be prudent to consider long-term care insurance policies in your forties or fifties.

According to Genworth’s Cost of Care Study, the average cost of a semi-private room at a nursing home in 2021 was $7,908, and the average price of a private room was $9,034.

Paying a monthly premium to a private insurance firm is the norm with long-term care insurance. Submit claims to the company if and when you require any of the covered services provided by the plan.

In conclusion

It’s essential to set aside money for retiree medical costs, as the typical retiree finds that 12 percent of their income in retirement is spent on these costs.

401(k)s, regular IRAs, Roth IRAs, and health savings accounts are just a few tax-advantaged investment vehicles available for retirement planning. If you expect to spend a lot of money on medical care once you retire, consider purchasing Medigap or long-term care insurance.