How Medical Expenses Could Derail Your Retirement
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How Medical Expenses Could Derail Your Retirement

Alex Ivey/The Fiscal Times

If you think you’re spending a lot on health care now, just wait until you retire.

While many expenses tend to decline in retirement, the money spent on healthcare isn’t one of them. Even retirees eligible for Medicare end up spending a large chunk of their income getting or staying healthy.

A recent report from the Employee Benefit Research Institute finds that average out-of-pocket recurring medical expenses for retirees are around $1,855 per year, not including hospital stays or nursing home care. That means the average 65-year-old retiree needs to have at least $40,000 saved just to cover those expenses.

A typical couple would need nearly $250,000 on hand to have a 90 percent chance of covering all their medical expenses in retirement.

That’s a jarring number for many workers who are starting to think about retirement, planners say. “You think you have a lot of money for retirement, but when you set aside the money you’ll need for health care, you may not have as much left as you think,” says Don Roy of New England Wealth Advisors.

Seven in 10 couples over age 50 have not discussed how much they’ll need to save to pay for health care in retirement, according to a recent study by Merrill Lynch and Age Wave.

Here are some strategies to help you prepare:

  1. Estimate your costs. EBRi’s $250,000 for a couple estimate is roughly in line with that of other think tanks, but it’s worth getting a more personalized estimate of health care costs. Enter information about your age, health and family history into an online calculator, like this one from AARP to get a ballpark sense of what your medical expenses may look like in retirement.

    If you’re far short of your projected need, start making changes now so that you’re not caught unprepared later. “That might mean that instead of taking a cruise or an extra vacation, you might need to save that money for your long-term health expenses and get those things tucked away beforehand,” says Bank of America Merrill Lynch adviser Mary McDougall.

Related: 5 Shocking Predictions About Retirement in America

  1. Max out your HSA. If you have access to a high-deductible health plan at work (a growing number of employers are offering them) you also get access to a health savings account. Individuals can put up to $3,350 into an HSA this year, and families can contribute up to $6,650. Those over age 50 can add another $1,000.
    The money put into an HSA is deposited pre-tax, grows tax free, and it’s withdrawn tax-free as well, as long as you use it for qualified medical expenses. The money rolls over every year (unlike an FSA), so there’s an opportunity to grow a really sizeable account. “Right now, the HSA is the most tax efficient savings vehicle we have in the United States,” says James Nichols, head of advice for Voya Financial.

  2. Get elective procedures done before your retire.
    Medicare plans or private plans purchased via the Obamacare exchanges tend to be less generous than employer plans for non-essential benefits such as dental or vision coverage. If you’ve got a great employer plan, make the most of it before you hang up your work clothes for good. Schedule expensive dental work before you say goodbye to your boss for good.

  3. Focus on getting healthy. It’s good advice anyway, but keeping active and fit, watching what you eat, and getting regular preventive treatment will help keep your medical expenses down in retirement.Retirees suffering from chronic conditions can expect to spend more than $300,000 on medical costs in retirement, more than twice the estimate for healthy individuals.

    Keeping healthy will not only keep your costs down, but it will also make your retirement more enjoyable. The vast majority of retirees (81 percent) cite health as the most important agreement to a happy retirement, according to the Merrill Lynch study, putting it ahead of financial security or having loving family and friends.

Related: Out-of-pocket Medical Costs Threaten Seniors

  1. Consider long-term care insurance. One of the biggest medical expenses—and one of the most unpredictable-- for retirees is a nursing home stay, which can easily run more than $50,000 per year. Planners say that long-term care insurance can be a good way to hedge against these costs, for some consumers.

    At more than $2,000 per year, LTCI doesn’t come cheap, however. It can be a smart move for those with more than $500,000 in assets (enough to be worth protecting) but less than $5 million (enough to self-insure). Look for a plan from a high-rated insurer that includes an inflation rider. The younger you are when you purchase it, the lower your premiums will be.

  2. Become a smart shopper. It’s becoming easier to make informed decisions about the cost of your healthcare, especially if you’ve got a high deductibles and copays. Do some research to see whether you can get a procedure done more cheaply by a different doctor or hospital, and consider switching to generic drugs to lower expenses.

  3. Have an end-of-life plan. The largest portion of medical expenses tends to come in the months before the end of your life. Studies have shown that patients with advanced medical directives (legally binding documents outlining their wishes when it comes to end-stage medical treatment), tend to have lower medical bills during that time. “If you’re plugged in, but you don’t want to be, you’re sapping all your money,” says certified financial planner David Jackson.

Update: This article has been corrected to reflect the cost of out-of-pocket recurring medical expenses for retirees.

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