Beyond Medicare: How to fund health care costs in retirement
As retirement draws closer, many of us cling to a false sense of security that Medicare will cover all of our health care costs. Once we hit 65, it’s all taken care of and we don’t have anything to worry about, right?
While it’s true that beginning at age 65 most Americans become Medicare eligible, the reality is there are many health care expenses that Medicare does not cover, such as routine dental and vision care, as well as long-term care. Medicare also puts caps on what it will pay for many prescriptions drugs, if anything at all. In fact, the average retiree spends about $4,300 per year on out-of-pocket health care expenses. [SOURCE: Center for Retirement Research at Boston College]. With many people now living decades in retirement, those costs can really add up over time.
The good news? There are options beyond Medicare to help you fund your health care expenses in retirement.
Long-term care insurance
As stated above, Medicare does not pay for long-term care. With more and more of us living well into our 80s and 90s – often with increasingly complex health care needs – the likelihood of requiring long-term care is increasing.
Fortunately, there are many private insurance options that cover long-term care. The general rule of thumb is that it’s better to purchase long-term care insurance when you are still relatively young, such as in your 40s or early 50s, than to wait until you are well in to your 70s or 80s when the cost becomes prohibitively expensive.
Also worth noting is that not all long-term care insurance plans are created equal. For example, some pay for in-home care, while others will only pay for nursing home care.
In addition, long-term care insurance can typically be paid through a health savings account (HSA), providing another incentive to maximize contributions to an HSA if you are eligible.
Supplemental health insurance
Many people choose to purchase supplemental health insurance to pay for those expenses that Medicare does not cover, such as routine dental and vision care, as well as certain prescription drug costs (Medicare Part D can be used to supplement prescription drug costs). As with any health insurance plan, consider your options carefully as plans can vary widely in terms of deductibles, premium costs, the health care providers you can see, and the expenses that are covered.
Health Savings Accounts (HSAs)
While you are still working, and if you are enrolled in an HSA, max out your contributions as you get closer to retirement to help pre-fund likely retirement health care expenses. Money in an HSA never expires. It’s yours until you spend it. For 2020, a single person can contribute $3,550 to an HSA. For a family (which includes an individual and a spouse) the maximum yearly contribution is $7,100. Those age 55 and older can contribute an additional $1,000 in “catch-up” contributions. [SOURCE: IRS]
With many of us likely to experience retirements that extend 20 or 30 years or more, it is more critical than ever to think beyond Medicare and develop a comprehensive plan to pay for health care expenses in retirement. Work with a qualified financial planner now to give you peace-of-mind going forward.