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# Preparing for Healthcare Costs in Retirement: What You Need to Know
Healthcare is poised to be one of the most significant expenses you’ll face in retirement, second only to housing and possibly transportation. Unlike previous generations, you may not have the cushion of employer- or union-sponsored retiree health benefits. As a result, planning for healthcare costs is essential to ensure a secure and comfortable retirement.
**Why Healthcare Costs Are Rising**
Several factors contribute to the increasing challenge of covering healthcare expenses in retirement. First, people are living longer, which naturally leads to higher lifetime healthcare costs. Additionally, healthcare inflation consistently outpaces general inflation, compounding the issue. With the average retirement age around 62—three years before Medicare eligibility—many retirees find themselves in a coverage gap that needs to be bridged.
“Healthcare costs are creating a significant financial challenge for many nearing retirement,” says Lynn Toomey, retirement educator, speaker and social media influencer. “Many people think once they’re on Medicare, their costs are pretty contained. But many retirees are in for a big surpirse if they don’t understand the out-of-pocket costs, including potential IRMAA surcharges.”
According to the 2024 Fidelity Retiree Health Care Cost Estimate, the average 65-year-old will need about $165,000 in after-tax savings to cover healthcare expenses during retirement. This is nearly a 5% increase from the previous year, reflecting the ongoing rise in healthcare costs.
However, the exact amount you’ll need depends on various factors, such as your health, location, retirement age, and lifespan. Additionally, the type of accounts you use to pay for healthcare—whether it’s a 401(k), HSA, IRA, or taxable accounts—and your tax rates in retirement will also influence your financial needs.
**Smart Strategies for Managing Healthcare Costs**
If you’re still employed and have access to a Health Savings Account (HSA) through a high-deductible health plan, consider taking full advantage of it. An HSA allows you to save pretax dollars, potentially grow your savings tax-free, and withdraw funds tax-free for qualified medical expenses in retirement. This can be a powerful tool for managing healthcare costs later in life.
As retirement draws near, you’ll face important decisions that will impact your financial future. These include determining when to stop working, when to start drawing Social Security, how to cover healthcare costs, and how to generate income from your retirement savings. Each decision is interconnected and can significantly affect your overall retirement lifestyle.
Approximately one-third of early retirees opt to claim Social Security at age 62, largely to cover healthcare expenses until they qualify for Medicare at 65. However, if you can delay retirement or save enough to cover healthcare costs until age 65, you may be able to defer Social Security benefits. Deferring until age 70 can significantly increase your benefits, which is particularly beneficial if you anticipate a longer lifespan.
**Medicare and Beyond: Navigating Your Options**
As you approach age 65, it’s essential to thoroughly review your Medicare options. You have a 7-month initial enrollment period, starting three months before the month you turn 65, to sign up for Medicare. Here’s a brief overview of the different parts of Medicare:
* **Part A:** Covers hospital expenses after you meet a deductible.
* **Part B:** Optional coverage for medical expenses that requires an annual premium. Delaying enrollment may result in a penalty that increases over time.
* **Part D:** Provides prescription drug coverage.
* **Medicare Advantage:** All-in-one plans that cover services under Parts A and B, often including additional benefits like Part D coverage.
* **Medigap:** Supplemental insurance offered by private companies to cover expenses not covered by Medicare Parts A and B.
**Tip:** Consider paying a higher premium to minimize out-of-pocket costs for doctor visits. Compare the costs of annual premiums, co-pays, and deductibles at various levels of supplemental insurance, and estimate the number of medical visits you anticipate for the coming year.
It’s important to note that while you can typically switch Medicare plans as your needs change, Medigap policies are an exception. Generally, enrolling in Medicare Parts A, B, and D when first eligible is advisable to avoid costly late enrollment penalties.
If you’re still working at 65 and covered by your or your spouse’s employer plan, you can enroll in Medicare later through a Special Enrollment Period when you leave your employer plan. Carefully evaluate whether Medicare or your employer’s plan offers better coverage for your healthcare needs.
**Planning Ahead: Avoid Coverage Gaps**
One of the key goals in retirement planning is to avoid any gaps in healthcare coverage. As you plan for healthcare expenses throughout retirement, remember that the need for medical care tends to increase with age. Rising healthcare costs are a concern, but there are proactive steps you can take to protect your retirement lifestyle. For example, if you’re 50 or older, you can make catch-up contributions to your 401(k) or IRA. Additionally, if you’re 55 or older, you can contribute an extra $1,000 annually to your HSA.
By planning ahead and understanding your options, you can manage healthcare costs effectively and enjoy a more secure retirement. If you would like to speak to a Certified Financial Planner about your retirement, Medicare or IRMAA (Income Related Monthly Adjustment amount), 
 September 3, 2024 By:  in ,   , , , , , 
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