Paying for health care

Don't let health care costs upend your retirement plans. Make sure you have the right Medicare plan, plus insurance coverage for out-of-pocket costs and long-term care.

If you are like most Americans, health care is expected to be one of your largest expenses in retirement, after housing and transportation costs. But unlike your parents’ generation, most of you won't have access to employer- or union-sponsored retiree health benefits. So, health care costs will likely consume a larger portion of your retirement budget—and you need to plan for that.

"Health care is creating a 'retirement cost gap' for many pre-retirees," says Lee Belniak, vice president in Fidelity Workplace Solutions. "Although many assume their savings will cover all of their expenses in retirement, health care costs are often higher than anticipated. Many people assume Medicare will cover everything, but it doesn't. The average 65+ retiree today should expect to pay around $5,0001 a year on health care premiums and out-of-pocket expenses, and should carefully weigh all options."

The drivers behind this mounting retirement health care cost challenge are clear:

  • People are living longer—particularly women. A healthy 65-year-old woman alive today has a 25% chance of living to age 96, versus age 93 for a man.2
  • Health care inflation continues to soar: 5.5% annually vs. 1% general inflation over the past year.3
  • Although many Americans expect to work longer, the average retirement age is 62.4 Medicare does not begin for most until age 65.
  • While women are living longer than men, their savings are often lower. Men ages 65 to 69 have average retirement account balances of $191,000; women only about $117,000.5
  • Where you retire matters; there can be big regional variations in health care cost and quality. For example, the cost of knee arthroscopy with ACL surgery for a retiree in New Hampshire is approximately one-third higher than the national average of $14,257.6

Health care: What's your price tag?

How much should you plan to pay in health care costs after you retire? According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2016 may need approximately $260,00013 saved (after tax) to cover health care expenses in retirement. Of course, the amount you'll need will depend on when and where you retire, how healthy you are, and how long you live.

rising_health_costs_2016_widgetTo help you plan for future health care costs, Fidelity has created an interactive Health Care Cost Estimator.14 Even if you're years away from retiring, you can answer a few questions and get an estimate of what health care may cost you in retirement.

Pre- and early retirees: Make the most of your time to prepare

As retirement nears, you will have several big decisions to make, including when to take Social Security, how to pay for health care, and how to generate cash flow from your retirement assets. These decisions are interconnected and could make a difference in your living costs and lifestyle in retirement—and when you can retire.

Some of the 40% of "early retirees" who claim Social Security at age 6215 do so to help pay for health care expenses until they are eligible for Medicare coverage at age 65. But if you can postpone retirement or save enough to cover health care costs until 65, you may be able to defer your Social Security benefits. The longer you can wait (e.g., until age 70) to take those benefits, the more you can collect, assuming you live a long life.

If you stop working before age 65 and need health care coverage, consider these options that may be available to you:

  • Read Viewpoints: Are public health exchanges for you?
  • Tip: If you're still working and your employer offers an HSA-eligible health plan, you may be eligible to contribute to a health savings account (HSA). An HSA offers a triple advantage:16 You can save pretax dollars (and possibly collect employer contributions), which have the potential to grow and be withdrawn tax free for federal tax purposes if used for qualified medical expenses—currently or in retirement. Read Viewpoints: 3 healthy habits for health savings accounts

Turning 65: Consider Medicare and other options

When you get close to age 65, spend some time reviewing and considering all your Medicare options. When you do become eligible at age 65, you'll want to remember to sign up during your 7-month initial enrollment period that begins 3 months before the month you turn 65. If you're still working when you’re 65 and get health insurance through your employer or your spouse's employer, you’ll have the opportunity to enroll in Medicare when you leave your employer plan through a Special Enrollment Period.

There's a lot to learn about the world of Medicare. You'll need to know about Medicare Parts A, B, and D, as well as Medicare Advantage and "Medigap" supplemental insurance plans.

In brief, Part A covers hospital costs after you meet a deductible. Part B is optional coverage for medical expenses and requires an annual premium. And Part D is prescription drug coverage. Medicare Advantage plans are all-in-one managed care plans that provide the services covered under Part A and Part B of Medicare and may also cover other services that are not covered under Parts A and B, including Part D prescription drug coverage. Supplemental policies, referred to as Medigap policies, are offered by private insurance companies to supplement Medicare Parts A and B.

Remember, once you select a plan, it's not forever. You can switch Medicare plans as you age and as your situation changes. Enroll in Medicare Parts A, B, and D when first eligible because the late enrollment penalty for doing so later is steep. Should you consider a supplemental Medicare plan to cover some of your out-of-pocket expenses? It depends on a number of factors, but here’s a money-saving tip from Dr. Orly Avitzur of Consumer Reports: "If you require frequent care due to multiple chronic health problems, such as hypertension, diabetes, or rheumatoid arthritis, selecting the right supplemental Medicare plan—which picks up the 20% that remains for outpatient visits—is important."

"You need to consider the various factors to help make your decision. Look at the cost of annual premiums and co-pays at different levels of supplemental insurance. Compare these costs. Then factor in the number of visits and co-pay/co-insurance per visit that you anticipate for the next year. You may be better off paying a higher premium but not having to pay out-of-pocket at your office visits," she adds.

Health care in retirement: Cost can come later

In general, overall retirement spending decreases through much of retirement but with a notable upturn at the end that can create a U-shaped retirement spending pattern.17 So planning for health care expenses throughout your retirement—however long it may be—is vital to your overall retirement income planning efforts because health care utilization tends to increase as we age.

In fact, according to the Kaiser Family Foundation, the percentage of household budgets spent on health expenses is nearly 3 times as much for retirees on Medicare as for working households (14% versus 5%).18

5 tips to hold down costs, no matter your coverage

Good health takes effort and is essential to a successful retirement, so here are 5 tips to help you stay healthy and save money on health care along the way:

  1. Live a healthy lifestyle. Exercise and proper nutrition go a long way to help reduce future medical care.
  2. Get regular check-ups. According to Consumer Reports' Dr. Avitzur, evidence suggests that having a primary care doctor, especially for people over age 65, means they are less likely to die of cancer, heart disease, or a stroke. She adds, "You're also less likely to need to go to an emergency room or be admitted to a hospital, so the importance of having a good relationship with a primary care physician who knows you should not be overlooked."
  3. Plan the timing of your expenses carefully. Ask your accountant if there are ways to help pay for medical expenses in a single year to help maximize tax deductions. "For example, consider buying an extra pair of prescription glasses if you need them, or stocking up on products like blood glucose test strips for diabetics, or making sure that you schedule (or pay for) a series of planned dental treatments all in the same calendar year. But be careful not to delay necessary care," advises Dr. Avitzur.
  4. Shop around. Look for the best level of care at the most affordable price for your anticipated medical services and prescriptions.
  5. Get clarity. Know what is covered and what is not. Don't make assumptions. For example, make sure the prescriptions you need are covered in your prescription drug plan. And check to see what procedures are covered. For example, having surgery to remove varicose veins might be considered a cosmetic procedure unless your doctor can establish that it was a medically necessary procedure.

"Health care is an essential expense in all phases of your life, but the cost can be substantial in retirement," Belniak says. "The good news is that you can gain control of it. Take the time to understand how it fits into your retirement plan. Health care is vital to living your life fully. So, do your homework and find the best way to pay for it."

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