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Six Ways to Prepare for Medical Costs in Retirement

Picture of Randall E. White

Randall E. White

retirement medical costs

When you’ve planned properly, retirement is an exciting and rewarding phase of life. If you’ve been strategic and disciplined, your financial plan likely includes a strategy for covering your healthcare needs, but did you know that a healthy adult retiring at age 65 will spend an average of $315,000 on medical costs in retirement? With such a hefty price tag, it’s common to underestimate the amount you will need to save for medical costs in retirement. In this article, I’ll discuss six strategies you can use to bolster your savings and gain more peace of mind.

1.     Know Your Options in Retirement

Navigating the healthcare system can be confusing and frustrating. However, the more you understand, the more control you gain. Knowing and understanding your options for health insurance, for example, and what you can do to fill in any gaps can go a long way toward saving you money and allowing you to overcome surprise medical costs.

A common option for retirees is to use Medicare, which you become eligible for when you turn 65. You can also qualify earlier due to certain medical conditions. It is your choice how many of the plan components you sign up for:

  • Plan A — covers hospitalizations and is free for most people
  • Plan B — includes physician visits and outpatient care
  • Plan D — covers prescription drug costs

When breaking down the average medical costs in retirement, most people pay 40% on premiums, 40% on copays and out-of-pocket expenses, and 20% on medications. Even with insurance coverage, of course, some of these costs can become overwhelming. That’s why some retirees purchase additional insurance that will help cover other medical costs. You may have heard this referred to as a Medigap plan.

You also have the option to continue using private insurance and switch to a Medicare Advantage Plan. Depending on your needs and your financial situation, this may be the best option for you. However, the maximum out-of-pocket costs can be high for private plans, so having a savings fund to match that out-of-pocket expense is smart in case of an unexpected illness and resulting medical costs.


2. Utilize a Health Savings Account (HSA)

You may consider contributing to a Health Savings Account (HSA) while you’re saving for retirement. To qualify, you’ll need to have a High Deductible Health Plan (HDHP). If your health insurance is provided through an employer, check to see if they have a matching contribution program in place.

An HSA is versatile and offers many benefits. You can use it to pay for Part B and Part D Medicare premiums, dental, vision, hearing, and over-the-counter medications, too. HSA money is either not taxed if your insurance comes through your employer or is tax-deductible if you have a self-funded plan. An HSA can be a smart choice if you’d like to pay for medical costs from a tax-free account in retirement.

3. Take Advantage of Medicare Open Enrollment

Choosing an insurance plan can be a confusing and daunting process. Once you’ve made your selection, it can be difficult to motivate yourself to look at plans again during the annual open enrollment period. However, taking the time to explore plan options each year can bring you both cost savings and a plan better suited to your needs.

4. Know When to Challenge the Medicare IRMAA Rate

In 2023, the standard premium for Medicare Part B is $164.90. However, you may receive an IRMAA notice – Income-Related Monthly Adjustment Amount. This means you’ll have to pay a higher premium due to your high income, and it’s calculated based on your most recent tax return on file. So, in 2023, you will be paying for Medicare as if you were making your income from 2021. If your income has dropped, you will want to challenge your IRMAA rate by filing an SSA-44 form. You’ll be required to provide paperwork supporting your claim of less income, along with either an adjusted tax statement or an estimate to prove your actual income to receive the reduction to your medical costs.


5. Think Outside the Traditional Healthcare Box

Some people reduce medical costs in retirement by looking outside the traditional model of healthcare. This includes alternative medicine, which won’t be right for everyone, and preventative care.

If you’re required to take medication, there are likely alternatives available to you outside the initial prescription you get from your doctor. For example, you might ask them to prescribe a generic form of the drug or a therapeutic alternative.

Preventative care is something anyone can focus on, whether in retirement or earlier. It can be a helpful way to cut down on costs before they occur. For example, we all know that exercise can lengthen life expectancy and improve our quality of life. Combining an active lifestyle with healthy eating can go even further in preventing the possible medical costs you might incur in future years.

6. Have a Plan for Long-Term Care

According to the U.S. Department of Health and Human Services, nearly 70% of retirees will need long-term care at some point. With that in mind, there are some startling figures you should know. The national average monthly payment for a home health aide is more than $4,000, and the average monthly payment for a private room at a retirement home is $8,800. These are significant costs usually not covered by Medicare. Medicaid will help cover some costs, but the options for care are restricted and it will only become available to you once you spend down your nest egg.

To overcome this potential financial hurdle, some retirees choose long-term care insurance. Having insurance can be a lifesaver if you are diagnosed with an unexpected, long-term illness, like Parkinson’s or Alzheimer’s. It’s also worth mentioning that long-term care insurance is considered a valid medical expense for most HSAs.

Final Thoughts on Planning for Medical Costs in Retirement

Though no one can predict the future, it’s likely that your medical costs will increase as you age – potentially quite significantly, too. However, with forethought and planning, you can still enjoy a peaceful retirement free from financial stressors. Knowing your options and building a personalized retirement plan can help you prepare to cover your medical costs in retirement and enjoy your golden years in financial security.

At TriCapital, we help our clients build wealth for life. If you’d like to feel more confident in your financial future, please schedule a conversation with us today.

Securities offered through Triad Advisors, LLC, member FINRA/SPIC. Advisory services offered through TriCapital Wealth Management, Inc. TriCapital Wealth Management, Inc. is not affiliated with Triad Advisors, LLC.

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