When planning for your golden years, many people prefer to think about the “good” costs they’ll face. Considering vacations, home renovations, or new hobbies, it can be fun to plan for the leisurely side of retirement.
But there are plenty of dangerous costs associated with your post-working years, too. In general, workers are most worried about running out of money, with 48% sharing this concern, according to a report from the Transamerica Center for Retirement Studies. Also, 44% are worried about the future of Social Security, saying they’re afraid their future benefits may be reduced or eliminated altogether.
There’s one overwhelming fear, though, that the majority of adults nearing retirement age say “terrifies” them: healthcare costs.
The scary reality of healthcare costs in retirement
A whopping 58% of adults age 50 and older say they’re “terrified” of how healthcare costs will affect their retirement plans, a survey from Nationwide found. In addition, nearly 70% of survey respondents said the idea of healthcare expenses potentially ballooning out of control when they’re no longer working is one of their top fears.
Healthcare costs are a valid concern. The average worker currently in their 40s can expect to spend roughly $335,000 on healthcare expenses alone in retirement, according to a report from Urban Institute. Longer lifespans also impact the amount retirees will spend, and those who live into their 90s or beyond could spend over $500,000 on healthcare costs.
Part of the reason healthcare expenses are so intimidating is that they’re unpredictable. Nobody knows exactly what health issues will arise decades down the road, so it can be impossible to predict how much those problems will cost. Also, Medicare doesn’t cover everything, and if you don’t fully understand how Medicare works and what expenses you’re responsible for, it can be costly.
Approximately 60% of workers age 50 and older said they wish they better understood Medicare coverage, according to the Nationwide survey. Medicare can be confusing, but not knowing what expenses are covered and what you’ll have to pay for out-of-pocket can make it harder to plan for these costs. And when you go into retirement without a clear idea of even the basic costs you can expect to face, you run the risk of spending more than you expected.
How much can you depend on Medicare in retirement?
Once you turn 65 years old, you’re eligible to enroll in Medicare. Some retirees may think all their healthcare costs will be taken care of once they have Medicare coverage, but there are still several expenses you’ll be responsible for.
First, you’ll still have to cover all premiums, deductibles, copays, and coinsurance. If you opt for Original Medicare (or Parts A and B), you typically won’t pay a premium for Part A but you’ll be responsible for a Part B premium of $135.50 per month in 2019. You’ll also face a Part A deductible of $1,364 per benefit period (which starts when you’re admitted to the hospital and ends 60 days after you leave), as well as a Part B deductible of $185 per year. Then, if you also want prescription drug coverage, you’ll need to sign up for Part D at an additional cost.
In addition, Original Medicare doesn’t cover most routine care, including dental and vision. For those expenses, you’ll either need to pay out of pocket, enroll in a Medicare Supplement insurance plan to fill the gaps in Original Medicare coverage, or sign up for a Medicare Advantage plan, which is similar to the insurance you likely receive through your employer. Because these plans are offered through Medicare-approved third-party insurance companies, rates vary widely — but you’ll likely pay higher premiums in exchange for greater coverage.
Regardless of which insurance option you choose, there will be out-of-pocket expenses to consider in retirement. The more you prepare for these costs now, the less you’ll have to worry about them once you retire.
Start preparing for healthcare costs long before retirement
The earlier you begin preparing for potential healthcare expenses in retirement, the less stressful they’ll be down the road.
One way to start saving for healthcare costs is to enroll in a health savings account (HSA). An HSA is essentially a mini retirement account just for medical expenses. You can contribute tax-deductible dollars upfront, let your money grow over the years, and then withdraw your cash tax-free as long as it goes toward eligible medical expenses.
One caveat to the HSA is that you’re only eligible for one if you’re enrolled in a high-deductible healthcare plan, meaning you have to have a deductible of at least $1,350 for individuals or $2,700 for families. You also are limited to how much you can contribute to an HSA. For 2019, the contribution limits are $3,500 per year for individuals or $7,000 per year for families, and those who are age 55 or older can contribute an additional $1,000 per year. If you’re eligible for an HSA, contributing as much as you can will help you establish a healthy nest egg just for healthcare expenses, making those costs less intimidating in retirement.
Another factor to consider when preparing for retirement is long-term care. Approximately 70% of today’s 65 year olds will need long-term care at some point, according to the U.S. Department of Health and Human Services, and the average stay in a nursing home costs roughly $6,800 per month. Furthermore, Medicare doesn’t cover long-term care, so you’ll be left to foot the bill if you need these services.
Long-term care insurance can help cover some of these costs, but the key is to sign up sooner rather than later. The older you are when you sign up, the higher your premiums will be. And if you wait until you need long-term care to enroll in insurance, you’ll likely be denied coverage altogether.
Healthcare costs are something every retiree will face at some point and can quickly drain your retirement fund if you’re not prepared for them. By educating yourself on what to expect and then adjusting your planning to account for these costs, you can ensure you’re doing everything possible to prepare for anything life throws your way during your golden years.