Financial Planning & Healthcare: How To Ensure That You Have The Resources You'll Need

Healthcare costs in America are rising quickly. In 2020, healthcare spending increased by 9.7% to $12,530 per capita. That's double the growth we saw in 2019. 

Fortunately for older Americans, Medicare covers most of these expenses. Contrary to common belief, however, it doesn't cover all of them. The average retired American couple on Medicare pays almost $11,400 per year out-of-pocket on healthcare expenses. That doesn't factor in long-term care costs, which can hit $100,000 a year. 

These figures are nearly double what the average American says they expect to pay in healthcare costs after retirement. Apparently, most people are not planning to spend 15% of their retirement income on healthcare — but maybe they should be. 

If you're healthy, you should expect to pay more. Why? Because you'll probably live longer. Reports of one study showed that a healthy 55-year-old woman could expect to spend $424,875 for medical costs in retirement while a woman the same age with diabetes would spend just $266,163 due to her shorter life expectancy. 

Since Medicare will not cover all health-related costs post-retirement, it’s more important than ever to plan ahead financially and make sure you have the resources you’ll need. Let's take a look at how to plan for your healthcare in retirement.

The Facts on Healthcare Spending in Retirement

How much do retired Americans actually spend on healthcare?

• Most retirees with Medicare Parts A and B, a prescription drug plan (Part D), and Medigap will spend about $2,500 annually in premiums. This number can more than double for retirees with high incomes. 

• A 65-year-old couple retiring in 2022 can expect to spend $315,000 in medical expenses in retirement.

• On average, healthcare expenses account for one-sixth (or 16%) of a retired American's budget each year, which is more than any other expense except housing (35%) and transportation. 

• Pre-retirement, financial experts recommend that a person have enough savings to cover at least six months' worth of expenses should they be unable to work due to illness or injury. Health and disability insurance can help with this goal, but they typically do not cover any preexisting conditions and/or any chronic illnesses such as diabetes or heart disease. 

• A Medicare Advantage or Supplemental plan might be the best choice for some retirees because it offers more coverage than basic Medicare.

Pre-Retirement Planning for Healthcare

If you have not yet retired, make sure you have appropriate health insurance for yourself and your dependents. 

In some cases, you might consider a high-deductible health plans (HDHP), which often provides you with low monthly premiums. There's only one catch, a higher deductible may result in you paying more out of pocket before the insurance company starts to pay its share.  A health savings account (HSA), however, may help you meet those deductibles and save for the future.

• Health Savings Accounts (HSAs) are accounts that allow you to save and invest money on a tax-free basis specifically for current and future health expenses. HSAs must be paired with a qualifying high-deductible health plan (HDHP). 

• High-Deductible Health Plans (HDHPs) are also known as catastrophic or coverage-only health plans because they mainly cover major medical events. These types of health insurance plans are often best for someone who is in relatively good health. While they usually come with lower monthly premiums than traditional health coverage, they have a higher deductible. This means you may pay more for your healthcare costs before your insurance starts to pay its share.

It can be helpful to talk to your insurance agent or your company's human resources team about your current healthcare plan. Different plans offer different levels of coverage, but the key is finding one that will be the best fit for your needs and budget. 

Healthcare planning and spending don't stop when you retire. It’s no surprise, your time at healthcare facilities is likely to only increase — so is the money you spend. That's why it's important to be prepared.

Post-retirement planning starts now! 

Post-Retirement Healthcare Options

If you're retiring soon, it's important to understand your healthcare options. You don't want to run out of retirement savings as a result of covering too many doctors' fees or hospital stays.

Medicare

Medicare is federally sponsored health insurance for people over 65 and some people with disabilities. People who qualify for social security retirement benefits automatically qualify for Medicare, too. 

Many retirees believe that Medicare will cover all their medical expenses in retirement, but this isn't true. Medicare can cover most doctor visits, medication, and hospital stays, but it does not pay the cost of copayments, deductibles, or long-term care.

To better understand Medicare, let's look at the program's various parts.

Medicare Part A 

The original program pays for hospital care, skilled nursing facility care after a hospital stay of at least three days, hospice care, and some home health care. Part A has no premiums but may cost you out-of-pocket costs based on how long and often you use these services. 

Medicare Part B 

Medicare part B is optional if you have creditable coverage elsewhere. It covers most doctors' visits, tests, and procedures that are not related to a hospital stay as well as ambulance transportation. Part B has a monthly premium (generally $230) but few, if any, out-of-pocket expenses once you're enrolled in this program. 

Medicare Part D

Medicare part D is the program's prescription drug coverage component. In this entirely voluntary part, Medicare offers low-cost private drug insurance primarily through HMOs or PPOs. Beginning in 2023, enrollees in Medicare part D can cap their insulin expenses at $35 a month.

Medicare Advantage Plans

Medicare Advantage Plans often cover what is in Parts A, B, and D and can provide coverage for things original Medicare does not (like vision, hearing, or dental). You can purchase one of these plans privately from an insurer, and the majority of them are HMO plans. Medicare Advantage Plans bundle your premiums and benefits. Their monthly premiums and out-of-pocket fees vary depending on which plan you select. 

Medigap Supplemental Plans

Medigap Supplemental Plans must be purchased privately from an insurer and are designed to cover expenses not covered by Medicare. They may cover things like copayments, coinsurance payments under Parts A and B, prescription drug coverage under Medicare Part D, routine eye exams, hearing aids, and foot exams up to $1,000 per year. There are a number of Medigap policies to choose from, they range from letters A through N. 

You’ll pay a monthly premium in addition to the monthly Part B premium you pay Medicare. Medigap premiums and out-of-pocket expenses depend on the plan you select, but ideally, the overall expense would generally still be less than if purchasing traditional Medicare benefits alone.

Health Savings Accounts

An HSA can provide tax-free money and savings on qualified medical expenses. Unlike other health savings accounts, HSA funds roll over from year to year, making them a great asset as you age and need more medical care. While you cannot fund an HSA once you're on Medicare, you can build up these accounts while you're still working to help supplement the cost of medical expenses in retirement.

Planning for Long-term Care

According to the AARP, about seven in ten individuals age 65 or older will need some form of long-term care. This can range from help with basic tasks like dressing, eating, and bathing to full-time care for people who have lost the ability to perform any self-care at all. Long-term care takes many forms including nursing homes, assisted living, residential care homes, non-residential care, and memory care.

Who Needs Long-term Care?

One in three retirees will never need long-term care. Another 20% will need care for longer than five years. The remainder will spend some time in a long-term care setting. Most people who go into long-term care for an extensive period of time have a serious health condition or a disability such as dementia or limited mobility.

How Much Does Long-term Care Cost? 

According to the American Council on Aging, the average cost of a private room in a nursing home is $108,405  per year. The average cost for in-home care, 24 hours 7 days a week, is more than double that number. Both are gross averages, though. Your long-term care costs will depend on the kind of care you need and the state you live in. 

Many people mistakenly believe that the government will foot the bill for their long-term care. In fact, Medicare does not cover the cost of most care past 160 days. Medicaid only picks up the bill after you have spent almost all of your assets. Even then, Medicaid will decide which nursing homes you qualify for. 

No federal program — except some administered by the Veterans Administration — helps cover the cost of assisted living, memory care, or in-home nursing.

What is Long-term Care Insurance? 

Long-term care insurance is a policy you buy that helps cover approved expenses for long-term care. Most modern policies are comprehensive. These can help cover nursing homes, memory care, adult day services, and in-home care. Most policies do, however, have benefit caps and may require you to cover the bill for a certain time period before they begin to pay.  

Some states also offer partnership policies that let insurance holders retain more of their assets should they need to transition to Medicaid after their policy expires. Talk to your insurance agent about the right policy and the right insurer for you. 

How Else Can You Pay for Long-term Care?

Generally, when a long-term care event occurs other expenses such as travel and entertainment costs go down. This may free up cash that was otherwise being spent. On its own, reducing expenses may not be enough. You can use retirement assets from your IRA, 401(k), or other investment accounts to help cover long-term care expenses. You may also dip into your home equity either through a loan, by utilizing a Reverse Mortgage or Home Equity Loan, or by selling your home and using the proceeds to cover care. 

Questions to Ask Your Financial Advisor About Healthcare?

Questions you might consider asking your advisor about healthcare after retirement include: 

• What type of insurance do I need after I retire? 

• How much is a typical monthly premium for a retired person? 

• What are the benefits and drawbacks of a Medicare Supplemental plan? 

• Will I qualify for Medicaid? 

• Should I consider a long-term care policy? Would it help to pay for long-term care in a nursing home or in my home? If so, what types of coverage can I get , how much is it expected to cost me, and how long would the coverage last? 

• How should I cover my insurance premiums and out-of-pocket medical expenses after I stop working?

Make sure to talk about your post-retirement healthcare plans with your financial advisor. If you would like to discuss your plans with an experienced wealth management professional, give us a call today. We'd love to talk with you!