Retirement is supposed to be glorious, a time to cross off items on your bucket list. One problem however, is that rising health care costs are tipping the buckets over on many retirees.
According to HealthView Services, health care expenses are projected to increase at a rate of 5.47% per year. This is more than double the 2% cost-of-living adjustment Social Security benefits provide in 2018. Those retirees that only budget for their Medicare premiums might be in for a rude awakening. Fidelity estimates the average 65-year old couple on Medicare will need $280,000 earmarked for healthcare. Add in items Medicare won’t cover such as dental work and long-term care, and Vanguard believes that number is closer to $500,000.
Those figures assume you retire at 65, but what if you want to retire before you qualify for Medicare? In Mahoning and Trumbull county, Medical Mutual is your only option for major medical coverage. Anthem recently left our market. A 60-year old retiree can expect to pay between $700 and $800 dollars per month for coverage that has a $7,250 deductible. Add your spouse, and that’s $16,800 to $19,200 per year on premiums alone! According to Ohio Health Benefits, this is a 34% increase in pre-Medicare premiums from 2017.
The fact of the matter is many people approaching or entering retirement underestimate how much they need to save/budget for health care expenses. The good news is that there are resources available to help. Online calculators, like the one offered by Fidelity, can help provide estimates. Most sophisticated financial planning software is capable of building in health care expenses and allows you to customize the inflation rate to match industry projections. Financial advisors and health insurance brokers can provide valuable input as well.
Another option to consider for those building towards retirement is a Health Savings Account. HSA’s have become increasingly popular since they were first introduced in 2003. HSA contributions are tax-deductible, account growth is tax-free, and what you spend on qualified medical expenses is tax-free. It’s a triple tax benefit, however, you must be enrolled in a High Deductible Health Plan to contribute to an HSA. You may access your HSA for non-medical expenses but would have to pay income tax on those distributions. Non-medical withdrawals prior to age 65 also incur an additional 10% penalty. Families can contribute $6,900 per year in 2018 and an additional $1,000 per year if the family plan holder is 55 or older bringing the total contributions to $7,900. Although designed to help with annual health care costs, HSA balances can be carried over from one year to the next. This is unique because HSA’s do not have to be held in cash. They can be invested just like an IRA or 401(k). Over time, an invested HSA can become a substantial bucket of money.
The moral of the story is that health care is an integral component of retirement. It’d be wise to consider your health and family history when building your financial plan.