Healthcare in Retirement Explained

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Healthcare in Retirement Explained

How do you account for health care costs in your retirement planning? If you’re like most, you are underestimating these expenses.

As we age, our health care spending climbs. In fact, it’s been reported that medical costs are among the top financial worries of Americans, and with good reason: Medical expenses are often the largest expense for seniors. But with some research and careful planning, you can be confident about your health care costs and coverage in retirement.

Signing up to Medicare

Once you hit 65 you will be eligible for Medicare. That will take care of a lot of your medical expenses, but probably not all. You’ll be required to pay a premium for some of your Medicare coverage, and you will probably want to purchase a private Medigap policy to cover all the costs that Medicare doesn’t (see more below). But be sure to sign up on time! Failing to do so will incur significant penalties for late enrollment. These penalties accumulate the longer you wait to enroll and can be very costly. You can avoid penalties by signing up for Medicare when you are first eligible.

Medicare Vs Medicaid

What’s the difference?

Medicare is a federally funded health insurance program. The program primarily covers people who are either age sixty-five and over or disabled, regardless of income. There is a monthly premium for non-hospital coverage, and patients also pay part of the costs through deductibles, copayments, and/or coinsurance.

Medicaid is a health assistance program jointly funded at the federal and state levels. The program supports low-income individuals and families, regardless of age. The income eligibility requirements vary from state to state. Patients typically do not pay anything toward covered medical expenses.

Medicare Parts A, B, C, and D

Medicare coverage is divided into four main parts:

  • Medicare Part A: Medicare Part A is known as hospital insurance as it covers hospital expenses like inpatient hospital stays, skilled nursing facility care, and hospice.
  • Medicare Part B: Medicare Part B is known as medical insurance as it is an extension of the hospital and medical supply/equipment insurance provided by Part A. Part B of Medicare covers preventative care, doctor visits, lab work, and outpatient services such as physical therapy.
  • Medicare Part C: Medicare Part C is commonly known as Medicare Advantage. At a high level, Part C provides an alternative to Parts A and B and usually eliminates the need for Medigap insurance. (Medigap insurance is a commonly selected option for those with Parts A and B. Medigap covers some on the holes in Medicare coverage). Part C is offered through private companies that contract with Medicare to provide Part A and Part B benefits.
  • Medicare Part D: Medicare Part D is the newest part and it covers prescription drugs for those who choose to purchase this part through the payment of monthly premiums. Like Medicare Part C, Part D is offered through private companies that contract with Medicare.

Like all insurance policies, there are variations in terms of deductibles, and excluded from coverage are long-term care services, vision services, dental care, and hearing aids.

How Much to Save

Your budget for health care will depend on your health and medical costs in the area where you plan to retire. And as mentioned earlier your expenses will likely increase as you get older.

It is estimated that the average couple will need $280,000 in today’s dollars for medical expenses in retirement, excluding long-term care. (For an accurate estimate of your own current and future health care costs try an online health care cost calculator.

Remember HSAs

Are you still in the workforce? Health savings accounts (HSAs) are tax-advantaged savings accounts designed to help people who have high-deductible health plans (HDHPs) with paying for out-of-pocket medical expenses. While these accounts have been available since 2004, too few eligible Americans are taking advantage of them.

What’s more, because HSAs offer several tax advantages, they can also be used to supplement retirement accounts:

  1. Tax deductible. All funds deposited into an HSA account are pre-tax, which lowers the participant’s total taxable income.
  2. Tax-free. As long as they are used to pay medical expenses, HSA withdrawals are not taxed. Interest earned and investment gains are also tax-free.
  3. Tax deferred. Any unused money in an HSA account grows tax-free, with all taxes deferred until the participant withdraws the money at age 65 or older. The money is then taxed (when used for a non-qualified expense), usually at a lower rate.

Retiring Early?

If you plan on retiring early (before 65) make sure you understand the cost of carrying your own health insurance premiums until you reach Medicare age. 

If you plan to retire within 18 months before you turn age 65, COBRA insurance through your employer may cover you until you qualify for Medicare. You’ll have to pay the cost of this insurance out of pocket, but it will offer the same coverage as your employer plan.

Final Thoughts

Many upcoming retirees, and people getting ready to transition out of the workforce, forget to budget for healthcare when they estimate their expenses in retirement. But at the end of the day, rising health care costs are going to be a reality. Make a line item in your budget for them.


Retirement Income Planning with CKS Summit Group

Health care costs continue to rise year after year, so you’ll need to have enough cash to be financially ready. If you’re not as prepared as you hoped for when approaching retirement, CKS Summit Group are here to help.

To combat financial uncertainties in your golden years, you need a portfolio which is capable of producing increased income, stable growth, preservation of principal, safety and flexibility all at the same time.

CKS designs custom portfolios to  protect during uncertainty and perform  during prosperity. Get in touch with us to set up your complimentary strategy session today. We look forward to hearing from you.