Retire Without Worry: Plan Now for Rising Medical Expenses in Retirement

Are you saving for rising medical expenses in retirement? Now is a good time to look at the money you’ve earmarked for retirement health care and ask yourself if it’s enough. For many—if not most—Americans, the unfortunate answer is “no.”

Consider this January 2022 report from the Employee Benefit Research Institute: It found that health care saving targets climbed 3-8% in 2021 over 2020.

“These are close to the biggest increases we have seen since 2012,” the report stated.

The study centered on the savings targets that Medicare beneficiaries need to cover premiums, deductibles, and other expenses—because, unfortunately, Medicare does not cover everything. Some estimates say it covers just 50-60% of a beneficiary’s total costs.

EBRI’s study found that the average 65-year-old woman now needs $159,000 in savings to have a 90% chance of covering premiums and median prescription drug expenses. The average 65-year-old man needs $142,000.

So what can you do?

Start Saving Early

Assuming you have at least a decade before you retire and preferably two or more decades, you can earmark a portion of your savings as a health care fund. Keep in mind that today’s numbers will likely climb, so plan to save more.

To arrive at your number, evaluate how long you have until retirement as well as your financial situation, ability to save, physical health, and longevity expectations. Consider working with a financial advisor to determine an appropriate number.

Invest in an HSA

If you can contribute to a health savings account, you have a valuable tool at your disposal. An HSA requires a high-deductible health plan to make contributions, and its tax benefits are threefold: It allows you to make pre-tax contributions, the contributions grow tax-free, and you can make tax-free withdrawals for health care.

We advise taking a long-term approach to your HSA. By paying for current expenses out of pocket while working, you give your account balance time to grow. You can make withdrawals to pay for medical expenses in retirement, including Medicare premiums and deductibles (Medigap premiums do not qualify).

Understand Medicare

Medicare has many moving parts, so it’s important to sit down and get a grasp on your options.

Parts A and B are termed Original Medicare and encompass hospital and medical insurance. As this Yahoo article points out, it can be financially detrimental to depend on them alone:

“Let’s say that you have a heart attack and the bill ends up being $100,000 … and then you’re going to owe $20,000. So it’s important for you to have … a Medigap policy and also a Medicare D policy. And so it adds to the cost. But if you get significantly ill, you’re going to be glad that you have that coverage.”

Medigap is a supplemental insurance plan to fill in the gaps—or the costs not covered by Original Medicare—while Part D is an optional benefit to pay for prescription drugs.

Alternatively, private insurers offer Medicare-approved plans called Medicare Advantage plans. This coverage can be less expensive yet more comprehensive than Original Medicare—for example, it may include vision and dental coverage. But Medicare Advantage plans often have drawbacks, including limited access to providers.

With each of these plans having its own rules on deductibles and premiums, it is wise to take your time to research the coverage that best matches your physical and financial needs.

Avoid IRMAA

If you have a higher retirement income (currently more than $91,000 for individuals and $182,000 for couples), your Part B and D premiums will increase. That’s because you must pay a charge called the income-related monthly adjustment amount (IRMAA).

For example, say you and your spouse had a modified adjusted gross income (MAGI) of $228,000 in 2020 (premiums are based on your IRS tax returns from two years prior). In 2022, your Part B premium would increase from the standard $170.10 per month to $340.20.

Strategies to avoid this surcharge should be considered as part of your overall retirement plan. For example, you can target the order in which you take distributions from taxable and non-taxable retirement accounts to help keep your retirement income low enough that you avoid IRMAA.

Other strategies for tax-free income may include Roth conversions, reverse mortgages, and cash value life insurance policies. Strive to use these strategies as part of a comprehensive retirement approach rather than as piecemeal fixes. Our Greenwood Village, CO financial planning firm works with each client to help determine the right course for optimizing finances, reducing taxes, and keeping Medicare premiums affordable.

If you have questions about the appropriate strategies for you, consider working with a financial advisor who provides comprehensive, fiduciary retirement planning. This plan should include your health care expenses, and as this article makes clear, the sooner you have a plan for that, the better.

We offer a complimentary 15-minute call. We can briefly discuss your financial situation and retirement concerns and share how we may be able to help.

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