Planning for Healthcare Costs in Retirement: What You Need to Know

Insights

We live in an era of groundbreaking healthcare. Countless novel surgeries, drugs, and life-extending tech hit the market every year, helping future retirees stand increasingly stellar chances of enjoying vibrant health in their golden years.

But this innovation comes at a cost, especially at scale. Even retirement savings that currently appear prodigious may fall short of the total needed for later-life healthcare and its attendant costs (copays, out-of-pocket, etc.)

Fortunately, wise planning can sidestep a potential shortfall down the road. As you map out your retirement planning, ensure you grasp the full landscape of retirement healthcare costs.

The True Total: Medicare and Its Limits

Many people assume that once they reach 65, Medicare will kick in and fully cover future medical costs. This is, however, a misconception. In reality, Medicare requires you to meet an annual deductible before covering roughly 80% of approved costs.

Needless to say, that remaining 20% can represent quite a sum, depending on your healthcare needs (and unforeseen issues). You’ll also need to pay premiums to receive Medicare coverage for more than hospital visits. Consider the various Medicare “parts”:

• Part A – This covers inpatient hospital visits and services like home healthcare. If you’ve paid Medicare taxes during your working life, you won’t need to pay for Part A.
• Part B – For outpatient needs, like doctor visits, X-rays, and lab work, you’ll need to rely on Part B. It requires monthly premiums.
• Part C – Known by the moniker “Medicare Advantage,” Part C comprises private insurance that offers at least the same benefits as Medicare, usually with extras.
• Part D – Standard with Medicare Advantage policies, Part D provides prescription drug coverage. You can also purchase it separately.

While Medicare may sound like blanket coverage, upon closer inspection, very little comes free. 

Additionally, if you plan to retire early (before age 65), you’ll likely need to purchase gap coverage to tide you over until you’re eligible to enroll in Medicare. This could include coverage through the federal exchange or your partner’s work plan.

How to Prepare

The earlier you strategize your action steps, the better your chances of setting aside sufficient funds for retirement healthcare. Allot time to take a few critical action steps.

#1 Estimate Your Needs 

With a specific target in mind, it’s easier to save. The specific number depends on your circumstances, but simulations have generated a number of projected savings targets. Consult them as you form your estimate:

• To have a 50% chance of having sufficient funds to pay premiums and afford median drug costs, men will require at least $96,000 and women $116,000.
• To have a 90% chance of affording premiums and medical costs in retirement, men will require at least $166,000 and women $197,000.

If you expect to deal with chronic conditions in retirement, you may need to aim higher.

Additionally, don’t forget to factor in the price of long-term care. While you may currently find yourself in fine health, independent living grows more challenging as you age.

Medicare often covers short-term stints in skilled nursing facilities, but the plans rarely fund nursing home placements or in-home aids. Long-term care insurance can cover these expenses—but prepare to shell out for premiums.

#2 Utilize a Health Savings Account (HSA)

If your current health insurance offers an HSA, and you have sufficient income, you should use it to stockpile funding for future healthcare costs. 

In 2024, for example, individuals could make deductible deposits of $4150, and families could contribute up to $8300. These limits rise annually to account for inflation. 

HSA principle compounds tax-free, and withdrawals remain nontaxable so long as they go directly toward valid medical expenses. 

#3 Keep an Eye on MAGI

Medicare imposes higher premiums on retirees with significant modified adjusted gross income (MAGI). MAGI includes items like tax-exempt interest. Other items that factor into retirement MAGI include:

• Retirement account distributions
• Inherited retirement accounts (such as from a deceased spouse)
• Income in your final year of work (affects your initial premium calculation)

If you anticipate receiving substantial income during your post-work years, it pays to plan payments, home sales, and IRA distributions in a way that minimizes your MAGI. Given the complexity of such strategizing, consider consulting an expert wealth manager.

#4 Enroll in Medicare Promptly

Your Medicare eligibility kicks in once you turn 65. But this doesn’t mean that you can simply enroll at your leisure. 

• Medicare features a seven-month initial enrollment period that spans the three months before and after your birthday month.
• Failure to utilize this enrollment period triggers steeper premiums for Medicare Parts B and Part D. 
• The longer you wait, the more these penalties snowball. Enroll as soon as possible to avoid depleting your savings on fines.

Under some circumstances, you may delay your enrollment. Exceptions exist if your spouse remains employed and enrolled in their company’s health insurance plan. Even so, you should carefully study the nuances of such a move.

Plan for Tomoro, Today

Retirement should offer the prospect of peace. A well-earned rest after decades of contribution. Financial stability forms the bedrock of this tranquility, and its foundations rest on foresight and wise investment.

Unanticipated medical costs represent a possible pitfall. Missing out on the compounding effect of shrewd investments—that’s another. But steering between these shoals while running a business and building a family…it’s challenging, to say the least. 

At Tomoro, we believe your golden years should be your finest. Leverage our expertise to unload the stress of present-day wealth planning so you can focus on your work, knowing a bright future lies ahead. Discover how we can help today.