Healthcare Planning for Retirees: What to Know

Retirement is an exciting milestone, but it can also introduce the burden of increased medical expenses. Between the cost of healthcare rising as you age, inflation, and Medicare not covering everything, it’s key to ensure you’re ready for the next stage of your life. By planning early—even years in advance—you can avoid scrambling to cover medical expenses in your golden years.

This article will detail what you should consider regarding post-retirement healthcare planning. This includes a breakdown of what Medicare options you have, strategies for saving and budgeting, as well as how long-term insurance factors in. We’ll also explain how a financial advisor can be an essential resource to plan for increased costs once you retire.

Understanding Healthcare Costs in Retirement

According to data from the Bureau of Labor Statistics, individual Americans over the age of 65 paid an annual cost of about $8,027 on average for healthcare in 2023. By comparison, those aged 45 to 54 spent about $6,331 annually in the same year. The difference, however, is that once you retire, much of these costs become out of pocket.

Why the rise in costs? Unfortunately, as you age, healthcare expenses increase due to a higher risk of medical events and frequent doctor visits. Prescription medications for chronic conditions can also quickly add to your yearly costs.

Without employer-sponsored health insurance, the financial burden of health coverage falls squarely on your shoulders, which can be somewhat remedied by Medicare. However, it doesn’t cover everything—long-term care, dental, vision, and hearing services are often excluded, leaving retirees with out-of-pocket costs. Additionally, you may face even higher expenses if you retire early and aren’t eligible for Medicare.

Moreover, healthcare costs are likely to rise each year due to inflation. For example, in September 2024, the inflation rate for medical care services sat at 3.6%. This makes it crucial to ensure you plan for much higher costs once you retire.

Navigating Medicare Options

Medicare is a key tool retirees use to help pay for their health insurance. This is a federal program that offers regular medical services and hospital visits. Original Medicare comes in two parts:

• Part A covers short-term hospital visits and hospice care. Typically, you don’t need to pay a premium for this coverage, but there is a deductible of up to $1,340.
• Part B helps pay for doctor visits and preventative healthcare. It also covers outpatient procedures. Unlike Part A, you must pay premiums that amount to $134-$428 monthly (premiums scale based on income), as well as an annual $183 deductible.

While Original Medicare may help with much of your healthcare needs, it doesn’t give you the full range of coverage. Other services, such as vision and long-term care, are separate and require you to pay out-of-pocket or add supplementary insurance, also known as Medigap.

In addition to Original Medicare, you can add Part C and Part D to help fill the gaps. The former is also known as Medicare Advantage, a private insurance option that helps fill coverage gaps. Meanwhile, the latter covers prescription drugs.

Stephen Kates, CFP^®, Principal Financial Analyst for RetireGuide.com, recommends that retirees “enroll in Medicare as soon as they are eligible, which begins three months before turning 65.” He adds that “waiting is not beneficial,” such as with “programs like Social Security.”

What to Do If You Retire Before Medicare Eligibility

While the general advice is to register for Medicare immediately, retiring before you’re eligible can present unique issues. If you stop working early, you should first check if your former employer offers post-retirement coverage. If they do, you can use that until you’re eligible for government benefits.

However, if your employer doesn’t offer post-retirement insurance, you must seek private health insurance options. “For those who retire within 18 months of turning 65, extending their employer healthcare coverage through COBRA may be the best option,” says Kates. He adds that, if that’s not an option, you’ll need to turn to your state’s “health insurance marketplace” for coverage.

Both COBRA and marketplace insurance are expensive options. Jung Seh, CFP^®, a financial advisor at Bogart Wealth, says it’s critical to “plan accordingly to determine how you can cover the gap between retirement and the start of healthcare.” This includes factoring in higher healthcare costs in your monthly budget and ensuring you have enough saved up before you retire early.

Considering Long-Term Care Insurance

Another important consideration to make is long-term care. According to Seh, “Assisted Living facilities cost about $114k per year and Skilled nursing about $168k for a semi-private room in Washington D.C. (cost will vary depending on location).” Unfortunately, for many families, these costs can completely derail their retirement and be a huge financial burden.

Because long-term care is so expensive, you can purchase insurance ahead of time to cover the associated costs. However, this is a separate coverage that’s not part of Medicare. Per CBS News, the average price of a long-term care policy with $165,000 in benefits is about $950 per year for a 55-year-old man. These costs can vary depending on when you enroll and your state.

It’s best to discuss the decision to invest in long-term care insurance with input from both a financial advisor and your family. Even if you’re in excellent health now, this policy could save your loved ones from shouldering tens of thousands in potential costs down the road.

Role of a Health Savings Account (HSA)

Health Savings Accounts (HSAs) are tax-advantaged investment vehicles that allow you to save for medical expenses once you retire. Earnings in the account grow tax-deferred, which means you must pay when you begin taking distributions. While you typically may not use the account to pay for insurance premiums, it does apply to the following:

• Deductibles
• Coinsurance
• Copayments
• Out-of-pocket health expenses

Per Kates, HSAs “are an excellent option for covering out-of-pocket medical expenses. All distributions that are used for qualified medical expenses, including Medicare premiums, are tax-free.” Additionally, once you turn age 65, “there is no longer a penalty for non-medical expenses, but these distributions will be taxable as income,” he says.

An HSA can also help pay for long-term care. However, Kates explains that “there are age-based limits on how much can be withdrawn tax-free for this specific purpose.” To help pay for long-term care, he recommends thinking over “all your options, including hybrid life insurance with long-term care riders, which offer less coverage but may be more affordable.”

You may only contribute to an HSA if you have a high-deductible savings plan (HDHP). These are typically available through employers, coming with a higher deductible than normal. As of 2024, these requirements constitute an HDHP:

• Minimum deductible of $1,500 for self-only coverage and $3,000 for family coverage.
• Maximum annual deductible and out-of-pocket expenses of $8,050 for self-only coverage and $16,100 for family coverage.

How a Financial Advisor Can Help with Healthcare Planning

As part of the retirement planning process, a professional can work with you to chart out a strategy for healthcare that is financially optimal for you. This includes determining how you’ll pay for insurance, opening an HSA (if eligible), and ensuring your income is enough to keep up with rising costs. This makes a financial advisor a vital resource not just for healthcare planning, but for your entire retirement strategy.

A professional can also be valuable when it comes to planning for long-term care options. As Kates points out, other options, such as hybrid life insurance policies, exist to lessen the burden of a standard long-term care insurance policy. With help from an expert, you can determine which options work best for you.

When searching for a financial advisor, look for fiduciaries with reputable designations and certifications, such as Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), and Chartered Retirement Planning Counselors (CRPC). These professionals will have extensive experience and education in various aspects of retirement planning. Additionally, their certifications mandate a high ethical standard, where they must put your best interests first.

If you need help locating a high-quality professional, consider using this free matching tool. After a short quiz regarding your current financial situation and goals, it’ll connect you with a vetted financial advisor that aligns with your needs.

Frequently Asked Questions

Do I need health insurance when I retire?

While health insurance isn’t a legal requirement, having a policy to protect you is a good idea. Out-of-pocket medical expenses can add up to thousands of dollars at a time, placing a significant financial burden on you and your family if you must pay for care without insurance.

Can I use my HSA to pay for health insurance premiums?

You can use your HSA for some, but not all premiums. If you become unemployed or retire early, you may use it to pay for COBRA. Additionally, if you are aged 65 or older, you can take distributions to pay for Medicare each month.

What happens if I retire before I’m eligible for Medicare?

If you retire before you’re eligible for Medicare, it’ll be up to you to obtain coverage during that gap. This typically involves buying from either COBRA or your state’s insurance marketplace. Both options can add up quickly, so it’s crucial to plan for these monthly premiums in your retirement strategy.