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Meeting with a retirement planner or financial management company can be an eye-opening experience, especially when the topic of health care comes up.  During our working years, health care is definitely a large expense, but with most people using employer sponsored plans and with earned salary coming in every month, it is considered just another regular expense.

But what happens when you no longer have a salary?

Beyond not having a fresh supply of dollars hitting your bank account each month, your health care costs will also increase, by a lot.

The discussion with your financial advisor about health care often yields several big questions:

  • How will you plan for increasing health care costs?
  • What does the average retiree pay for health insurance?
  • How much money will you need for health care in retirement?
  • Do you need health insurance if you have Medicare?

The list goes on and on, but these are the questions that routinely come up in financial planning sessions.  Let’s take a look at each question and some of implications.

How to plan for increasing health care costs?

Health care costs are increasing, fast.  The Centers for Medicare and Medicaid Services says that costs may increase as much as five and a half percent over the next ten years or so.  This means that our out of pocket expenses are going to get much greater in the coming years.  In fact, Fidelity investments has estimated that an average retired couple, retiring in 2019, may need somewhere around $285,000 after taxes just to pay for health care costs during retirement.

Planning for this is imperative and should be started as early in your earning years as possible.

There are a couple of things you can do to help cover your health care costs.  Postponing retirement by just a couple of years, until you’re 65, will mean that you’re eligible for Medicare, which will lessen the burden of your health care costs.  Moreover, you may be able to defer Social Security, which means that when you do start collecting it the amount will be greater, further cushioning your need for savings.

What does the average retiree pay for health insurance?

USA Today reported, “The average retiree spends around $4,300 per year on out-of-pocket healthcare costs, according to a study from the Center for Retirement Research at Boston College, and that doesn’t include long-term care.”

Even with an estimate, the costs can vary by a great deal and are complicated by government run insurance programs.  For example, Medicare has several coverage options, which you may or may not need depending on your situation.  Hospital visits are covered by one element of Medicare, and prescription drugs and preventative care by others. 

The bottom line is that while the government does provide some help, Medicare is not free.   Not only will you have to pay your premiums, but dental and vision may not be covered at all.

Use a financial planner to help navigate these waters and come up with an estimate that is unique for your situation.

How much money will you need for health care in retirement?

This question is going to depend entirely on your personal condition and your expectations for care.  This is the type of question that can only be answered by consulting with a financial planner who is well versed in the intricacies of Medicare, tax planning, and who also understands your personal situation.

The number Fidelity uses as an average, $285,000.00, is likely in the ballpark of expected savings needed.  Healthview Services, a company that provides cost projection software for financial services firms, estimates the expected savings needed at closer to $390,000.00!

Think about it like this: If you retire at 65, you may well live another 30 years.  How will you will pay for 30 years worth of medical costs, when your expenses will be at their absolute peak due to both increasing costs and increasing need?

Through this lens, the picture is clear. You will need a great deal of savings, and you should have this conversation with your financial advisor as soon as possible to get a plan in place.

Do you need health insurance if you have Medicare?

In short, yes.  Medicare does cover a good portion of your expenses, but not nearly all of it, and in many cases, not nearly enough. 

Not only will Medicare not cover all of your expenses, but you still have to pay for it.  Medicare is not free.  Most retirees purchase either a Medicare Supplemental Plan or a Medicare Advantage Plan.   Medicare is just like any other insurance program with premiums paid by the insured.  The big difference is that it is government run, so changes and customizations are not available as they are in the private market. 

Most retirees have some form of supplemental health coverage for retirement.  Of course, with the additional coverage, comes additional cost. 

The bottom line on retirement health care costs?

Start saving now and do so with the advice of a certified financial planner, who understands your personal needs and expectations of care.

As such an important part of your retirement planning, Dechtman Financial Management is well versed in the planning aspects and tax implications of retirement and health care. Call today to schedule a consultation.  Don’t wait.

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