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Prepare now for retirement health care costs

Insurance rates expected to go up
Health insurance rates could spike by 2019 01:38

While many workers picture life in retirement to be far less stressful than what they deal with on the job, at least in one regard it could easily get more stressful. That's because of health care costs, which continue to be one of Americans' biggest post-retirement expenses. Unlike previous generations, few of today's retirees have access to employer- or union-sponsored health insurance.

So you're largely on your own when it comes to making sure you're adequately covered -- and you can afford that coverage.

According to Fidelity's most recent Retiree Health Care Cost Estimate, a retired couple age 65 in 2018 may need to have saved approximately $280,000 on average to cover their likely health care costs in retirement. 

To plan a successful strategy for this situation, you have to acknowledge the challenge and begin to tackle it early.

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The best financial strategy is to use a health savings account, if you're eligible for one. An HSA is a special account that allows you to contribute and accumulate money tax-free that you can later withdraw tax-free to reimburse yourself for medical expenses. Yes, money you contribute to an HSA is tax-free on the way in, grows tax-free and is tax-free when you take it out. No other long-term savings account offers this triple tax-free benefit.

The catch: To be eligible for an HSA, you must be covered under a "high deductible" health insurance plan. That's one with an annual deductible of at least $1,350 for an individual or $2,700 for a family. The maximum annual HSA contribution in 2018 is $3,450 for individuals and $6,900 for a family. Those age 55 and older can contribute an additional $1,000 annually.

Given that Medicare is available for those reaching age 65, another strategy is to delay retirement until after that age rather than retiring at the current average of 62. Early retirement for most workers means leaving behind employer-provided health insurance. 

But at age 65, Medicare becomes the primary source of health coverage for most retirees. In fact, Medicare covers over 62 percent of medical expenses for people 65 and older. Most people are automatically covered at 65 by Medicare's hospital insurance component, called Medicare Part A. This coverage comes at no cost as long as you or your spouse paid Medicare taxes during your working years.

Medicare Part B covers the services of your doctor, outpatient hospital care, physical and occupational therapy and even some home health care. Premium costs for Part B, which depend on your income, range from $109 to as much as $428.60 per month.

Because Medicare includes significant limits for what it will pay, expect to incur large out-of-pocket costs when this your only coverage. For this reason, many people also purchase a supplemental, or Medigap, policy for coverage that fills Medicare's gaps. 

Medigap policies offer you more choices regarding where you get your medical care, but you may pay a higher premium for this. You'll also have to manage multiple policies and ID cards. If that sounds onerous, another option is a Medicare Advantage or Managed Care Plan. This is also referred to as Medicare Part C, an all-in-one plan that combines Medicare Part A and B. These policies replace basic Medicare and often come with additional prescription drug coverage.

Finally, workers 50 and older can make catch-up-contributions to their 401(k)s or IRAs, up to $6,000 annually for an employer-provided retirement plan or $1,000 for an IRA. This age group can also make a $1,000 catch-up-contribution to an HSA. These extra savings will help you shoulder the additional health care costs you'll run into in retirement.

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