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How to Prepare for Health Care Costs in Retirement

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There is a simple and unsettling reality in the United States. Many Americans don’t feel financially prepared for health care costs in retirement.

It’s never too soon to learn how to prepare for health care costs in retirement.  A recent study of U.S. adults ages 50 to 64 found that about half (45%) had low confidence in their ability to even afford health insurance during retirement.

Kiplinger’s recent article entitled “Are You Prepared for Health Care Costs While in Retirement?” says that the average 65-year-old couple in 2020 will need roughly $295,000 in today’s dollars during their retirement to cover health care expenses. And that’s not counting long-term care.

However, depending on your age, income, health, location, and Medicare eligibility, that figure could be much different. When long-term care is added, the expense for health care can increase dramatically. According to the U.S. Department of Health and Human Services, a person turning 65 today has almost a 70% chance of needing long-term care services in the senior years. Right now, the national average median cost is $8,821 for a private room in a nursing facility and $4,576 for a home health aide. Therefore, planning ahead is critical.

Let us look at what can you do to help save for retirement and health care savings.

Use a tax-free account for health care expenses. You can start budgeting for your health expenses by contributing to a Health Savings Account (HSA). If you have a high-deductible health care plan, your employer may offer an HSA. An HSA lets you contribute, while receiving a tax deduction. The money can be invested and grow tax deferred. If this money is eventually used for qualified medical expenses, the withdrawal is tax-free. This year, the IRS allows individuals to contribute $3,600 and families to contribute $7,200. This can add up to a significant sum, which can be a readu source of health care funds, when needed.

Prepare for long-term care. Medicare Part A covers skilled nursing care for a specific period after hospitalization. However, it doesn’t pay for long-term care for Alzheimer’s or other chronic illnesses. That is why many people buy a long-term care (LTC) insurance policy. This policy will go beyond what your health insurance may cover, by reimbursing you for services needed to help you maintain your lifestyle, if age, injury, illness or a cognitive impairment creates difficulties for you in caring for yourself. With long-term care insurance, you can prevent your retirement and savings from being depleted, if this care is needed in the future. An LTC insurance policy provides your loved ones with greater options for providing care, while relieving them from full-time caregiver responsibilities.

It makes a difference where you live. Another factor that will have a big effect on how much you spend on health care is where you’re living in retirement. Traditional Medicare coverage is the same all over, but prescription coverage (Part D), Medicare Advantage (Part C), “Medigap” supplemental plans, and private insurance vary, depending on where you live. Plus, the costs of long-term care can vary by thousands of dollars from one state to another. If you’re currently living in a state where health care costs are higher, you might think about moving somewhere else in retirement.

Look at your age when you retire. A person can start collecting Social Security at age 62, but you can’t begin Medicare until age 65. If you choose to retire earlier than 65, there are a few options you can look at for health insurance. When you retire, you may choose to continue your employer’s coverage under COBRA for up to 18 months.  However, your premiums will increase substantially because you’ll be paying the full premium without the employer’s contribution. If your spouse is still working and eligible for health insurance, you may be able to move to their plan. You can also buy an Affordable Care Act plan on a federal or state health insurance marketplace.

Reference: Kiplinger (Feb. 15, 2021) “Are You Prepared for Health Care Costs While in Retirement?”

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