Changing Costs of Health Care in Retirement

One of the largest out-of-pocket expenses facing retirees is the rising cost of health care. For some, this challenge can be financially draining. According to a Fidelity Investments annual report on retiree health-care costs (8/2014), a 65-year-old couple retiring in 2014 will need to have saved $220,000 to meet health-care expenses during their retirement.

The time to plan for rising health-care costs in retirement is now!

With rising costs in healthcare, and the realization that retirees with benefits from former employers will be expected to ante up for the cost of care, there are some very good options to explore beyond the exchanges and out-of-pocket without financial benefits. 

  • A tax-free resource to consider for building your health-care nest egg is a Health Savings Account (HSA). It’s likely that a portion of your retirement savings will be allocated for health expenses so a tax efficient HSA may be a savings vehicle for you. Employers and employees make tax-free contributions to the HSA. Balances can be used to meet deductibles but can also be rolled-over from year to year. Should you change jobs the accounts are portable and all withdrawals are tax free. Contribution limits set for employers and employees are $3,300 for an individual and $6,550 for family coverage.
  • Consider delaying filing for Social Security benefits. If you wait to claim Social Security at full retirement age (currently age 66) you will receive 100% of your primary insurance amount (PIA). If you take it at age 62 (first year of eligibility) you’ll receive just 75% of your PIA. However, if you are able to wait until age 70 to claim (the maximum year for delayed filing) you will receive 132% of the PIA. This increase is due to the annual cost-of-living adjustment added in during those years of delayed filing.  Waiting to file equals a higher annual lifetime income which can be used to offset increased health-care costs.
  • Roth IRAs offer another tax-advantaged savings tool to meet health-care costs in retirement as the accounts are not subject to required minimum distributions and most withdrawals are not subject to taxes.
  • Review your Medicare options carefully; Medicare Advantage and Traditional Medicare. Medicare Advantage covers both Medicare Part A (hospital) and Medicare Part B (medical insurance), eliminating the need for a Medigap supplemental plan which covers out-of-pocket expenses and the Medicare Part D prescription drug plan, both of which are required with a traditional Medicare plan. With Medicare Advantage you are required to use the Advantage plan’s provider network and with regards to your prescriptions, confirm your medications are covered by its prescription plan. With traditional Medicare you can use any health-care provider. Depending on the Medicare plan, there may be additional co-payments and deductibles but the total annual out-of-pocket costs are capped.
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