Managing Healthcare Costs in Retirement

According to the 2023 Fidelity Retiree Health Care Cost Estimate, a person who retires at 65 can expect to spend $157,500 in health care and medical costs throughout their retirement. If we assume an average retirement span of 20 years, that amounts to more than $7,800 per year. You might also expect your annual costs to increase with time because of the growing health care needs associated with advancing age.

Planning is critical for anyone needing to allocate large amounts of their savings to medical bills as the years progress. To that end, there are multiple strategies for ensuring sufficient income after you leave the workforce, along with at least one crucial method for reining in the costs of health care in retirement.

3 Planning strategies for funding your retirement health care costs

It's never too late to apply profitable growth strategies for retirement. Even in your 50s and 60s, the methods we discuss below can help balloon your nest egg enough so that your health care expenses become proportionally less concerning. As always, you should run your strategies by a financial adviser to ensure they align with your goals and means.

Make catch-up contributions

Catch-up contributions refer to increased funding potential for retirement accounts, such as 401(k)s and IRAs, which place limits on how much you can contribute in a given year. In 2024, you can contribute up to $23,000 to your 401(k) and $7,000 to your IRA without incurring tax penalties.

However, when you turn 50, the IRS allows you to contribute more than the standard limit — up to $7,500 more for 401(k)s and an additional $1,000 for IRAs — so you can catch up on the years you underfunded your accounts. Making these contributions helps maximize your balances and takes advantage of compound growth.

Use a Health Savings Account for retirement

You may be eligible for an HSA if you have a high-deductible health plan. In 2024, that means a health plan with an annual deductible of at least $1,600 for individual coverage and $3,200 for family coverage. HSAs allow you to withdraw money for qualified medical expenses at any time tax-free.However, if you withdraw for non-medical expenses, you pay taxes -- and if before age 65 you pay a 20% tax penalty.

Aside from its primary role of letting you set aside pre-tax dollars to pay for qualified medical expenses, an HSA can also function as an additional retirement savings vehicle. As with a standard retirement account, the IRS sets an annual contribution limit ($4,150 for individuals and $8,300 for families in 2024). The money you contribute to your HSA grows tax-deferred, and you can make an additional $1,000 in catch-up contributions every year after age 55.

Consider contributing to an annuity

An annuity is another type of retirement vehicle you can purchase through an insurance company or other annuity provider. Specifically, it's a contract you enter by which you agree to provide a sum of money to the provider in exchange for regular cash distributions in the future.

When you purchase an annuity, you make your initial contribution in either a lump sum or a series of installments. The provider then invests the money for an agreed-upon contract term, allowing it to grow tax-deferred. The rate at which it grows depends on whether you have a fixed annuity, which credits your account at a set interest rate determined at the time of purchase, or a variable annuity, where the interest rate fluctuates in line with market changes.

One of your options at the end of your term is to annuitize your contract, which means converting it into cash distributions, as mentioned above. Depending on your arrangement, the income stream may run through the life of your retirement. You can use your annuity distributions to supplement your other retirement income (e.g., Social Security benefits and retirement accounts) to help cover medical costs that arise as you age.

Medicare for managing your healthcare costs

The federally administered health insurance program Medicare can go a long way toward keeping your medical expenses within your retirement budget. Medicare is usually much cheaper than private insurance, allowing you to receive medical services at a reduced rate.

Keep in mind that Medicare has four parts, each involving a unique cost and relating to a different category of medical services:

• Part A: Medicare Part A is hospital coverage. It pays for the care you receive in hospitals, skilled nursing facilities, and hospices, as well as some forms of home health care.
• Part B: Medicare Part B is medical coverage. It covers medically necessary services (e.g., doctor visits, outpatient care, and preventive care) and supplies. Most people receive Part A at no cost. Part B comes with a monthly premium that starts at $174.70 and an annual deductible of $240 (as of 2024). The monthly premium increases for higher earners.
• Part C: Medicare Part C is Medicare Advantage, which refers to private insurance sold by Medicare-approved providers. Depending on the provider you choose, Part C may provide coverage in areas that A and B don't, such as vision, hearing, and dental.
• Part D: Medicare Part D is prescription drug coverage. Every Medicare D plan comes with a list of prescriptions covered by the plan. The amount you pay for Part D depends on your income, but the cost is low. The Centers for Medicare & Medicaid Services projects an average monthly premium of $55.50 in 2024.

If you've started receiving monthly Social Security benefits, you automatically get Medicare Parts A and B when you turn 65. However, if you've elected to delay your Social Security benefits, you need to self-enroll within a seven-month window, known as the initial enrollment period (IEP), which spans the three months before, the month of, and the three months after your 65th birthday.

Unless you have another form of creditable coverage, missing your initial enrollment period (IEP) for Part B will increase your premium by 10% for every 12 months you go without coverage. For Part D, the penalty is 1% per month. These are lifetime penalties, so timely enrollment is the key to minimizing your health insurance costs as a retiree.

The importance of long-term care insurance

Long-term care refers to medical and non-medical services for people who can no longer perform activities of daily living, such as dressing, bathing, and toileting. It's not covered under Medicare or most regular health insurance plans. That being the case, you may want to incorporate long-term care insurance into your retirement budget.

Long-term care insurance isn't cheap. The American Association for Long-Term Care Insurance reports that the annual premium for a policy valued at $165,000 in benefits may cost around $1,700 for a 65-year-old man and $2,700 for a 65-year-old woman. The thing is, those annual premiums are a bargain compared with the price of nursing home facilities, which have median monthly costs of $8,669 to $9,733, according to Genworth.

The decision to purchase long-term care insurance is something you should discuss in detail with your financial adviser. Based on your current and projected financial situation, you may be better off paying out of pocket or establishing a more cost-effective care arrangement. Also, depending on your health, you may not need long-term care at all.

Contact Blueprint Income for assistance when planning for retirement

To learn more about folding an annuity into your retirement plan, contact an annuity consultant at Blueprint Income. You can email us at support@blueprintincome.com or call us at 888-867-7620.

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