Managing retirement healthcare cost
Retirement Planning

Managing retirement healthcare cost: A guide

Table of Contents




Managing retirement healthcare cost is a major concern for many retirees today. With healthcare costs continuing to rise much faster than overall inflation, retirees need strategies to help cover these expenses on a fixed income. This article outlines key steps retirees can take to reduce retirement healthcare costs and make the most of their retirement savings.

Understanding Medicare and other insurance options

The first step is understanding your Medicare options. Medicare is the federal health insurance program for seniors 65 and older. Traditional Medicare has two parts:

  • Part A covers hospital stays and skilled nursing care. Most people don’t pay a premium for Part A since they or their spouse paid Medicare taxes while working.
  • Part B covers doctor visits and outpatient services. It has a monthly premium of $170.10 in 2023.

Medicare also has:

  • Part D for prescription drug coverage. Plans have monthly premiums averaging around $33 in 2023.
  • Medigap policies that help cover Medicare out-of-pocket costs. Premiums average $206 per month but vary by plan.

Medicare Advantage plans like HMOs and PPOs combine Part A, Part B, and often Part D into one plan with one premium. Your costs and coverage will depend on the specific plan chosen.

It’s also important to understand coverage from a former employer or union. If you have retiree health benefits, coordinate this with Medicare to maximize coverage.

Budgeting for healthcare costs

With a basic understanding of insurance options, the next step is budgeting for out-of-pocket costs not covered by insurance. These can include:

  • Medicare premiums
  • Deductibles and copays
  • Dental and vision care
  • Hearing aids and medical equipment
  • Long-term care

Aim to have 8-10% of your retirement income budgeted for healthcare. The average 65-year-old couple retiring in 2023 will need around $315,000 saved for lifetime medical expenses.

Add a buffer since healthcare costs often rise faster than overall inflation. One strategy is allocating 20-25% of your portfolio to health savings accounts (HSAs), savings specifically for medical expenses.

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Choosing cost-effective healthcare

There are many ways to reduce your out-of-pocket medical spending in retirement:

  • Stay in-network with Medicare Advantage plans to minimize copays and maximize coverage.
  • Use mail order prescriptions and generic drugs which have lower copays.
  • Take advantage of free preventative care and health screenings from Medicare to stay healthy.
  • Consider dental discount plans and clinics over traditional insurance to reduce premiums.
  • Delay collecting Social Security to increase your benefit checks and budget for healthcare.
  • Move to a state with lower healthcare costs like Alabama or Tennessee.

Using tax-advantaged accounts

Several tax-advantaged accounts can help save for healthcare expenses:

  • Health savings accounts (HSAs) – Triple tax savings on contributions, growth, and withdrawals for medical expenses. HSA funds rollover year to year.
  • Flexible spending accounts (FSAs) – Save pre-tax dollars for healthcare costs but funds don’t rollover each year.
  • Health reimbursement arrangements (HRAs) – Employer-funded accounts for medical expenses. Unused funds can roll over year to year.

Maximize contributions to these accounts during your working years. After age 65, you can withdraw HSA funds for any purpose without penalty, allowing you to effectively use them as a retirement savings account.

Considering relocation

Relocating to a lower-cost area can significantly reduce healthcare expenses, primarily through lower long-term care and insurance costs. For example, long-term care in New York costs $169,000 annually compared to $93,075 in Alabama.

Factor healthcare costs into your relocation decision. Look for areas with excellent hospitals and senior centers. Ensure your doctors accept your new Medicare Advantage or Medigap plan.

Leveraging home equity

Many retirees use their home equity to help fund healthcare. With home values rising, you may have significant equity to leverage. Options include:

  • Downsizing to a smaller home. This frees up equity to cover medical expenses.
  • A reverse mortgage. These allow seniors 62 and older to access home equity as tax-free income.
  • Home equity loans/lines of credit. These provide lower-cost financing for medical costs.

A financial advisor can help analyze these home equity options for your situation.

Working part-time

Some retirees take on part-time work to help cover rising healthcare expenses. Even working 10 hours per week can provide enough extra income to cover Medicare premiums, copays, and prescriptions.

Look for flexible, low-stress jobs to supplement your retirement income. Many seniors work part-time in retail, tourism, and healthcare. Just be aware of how working impacts your Social Security benefits.

Seeking assistance

If you’re still struggling with medical costs on a fixed income, there may be assistance programs available:

  • Medicaid covers long-term care costs for qualifying seniors. Eligibility is based on income and asset limits that vary by state.
  • Medicare Savings Programs through Medicaid help pay for Medicare premiums, deductibles and copays if you meet income and asset requirements.
  • Pharmaceutical companies often offer prescription cost assistance programs for seniors meeting certain criteria.
  • Community groups and nonprofits may provide medical transportation and care assistance. For example, Little Brothers Friends of the Elderly provides visits and support for socially isolated seniors.

Tap into these resources if needed to help cover retirement healthcare costs.

Key Takeaways

Managing rising healthcare costs is crucial for retirees. Strategies like budgeting adequately for medical expenses, leveraging tax-advantaged savings accounts, choosing cost-effective care, and exploring assistance programs can help retirees cover these costs on a fixed income. With proper planning, retirees can navigate increasing medical expenses and continue to enjoy their golden years.



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