Retirees, make sure medical expenses are part of your plan

How much will a 65-year-old retired couple spend on medical expenses for the rest of their lives? $260,000. That’s the estimated amount needed in today’s dollars, according to a recent study by Fidelity Investments.

For many older workers approaching retirement, medical expenses represent one cost of living that can increase significantly when they retire, assuming they were covered by a typical employer-sponsored medical plan while they were working. That’s why older workers will want to factor in their estimated medical expenses during their retirement years when assessing whether their Social Security, pensions (if they have one) and retirement savings are adequate to finance their retirement.

Fidelity’s medical expense estimate includes future Medicare premiums, deductibles and co-payments associated with Medicare Parts A (hospital services), B (outpatient services) and D (prescription drugs). It also assumes you won’t be covered by a supplemental medical program such as an employer’s retiree medical plan.

The trouble is, most older workers don’t have $260,000 in retirement savings to cover all their living expenses, let alone their medical costs. For example, the 2016 Retirement Confidence Survey, administered by the Employee Benefit Research Institute (EBRI), found that more than half (54 percent) of workers age 55 or older reported that they or their spouse had saved less than $100,000 for retirement.

Fortunately, it’s not absolutely necessary for you to set aside $260,000 in savings when you retire to devote to future medical expenses (although that might be one good strategy). You can pay for future medical expenses with regular income you might receive in the future from Social Security, pensions (again, if you have one) and income you get from working.

Here are a few other ways you can manage your medical costs:

  • Selecting a Medicare Advantage plan that delivers benefits normally paid by Medicare Parts A, B and D, typically through a managed care network.
  • Buying a Medigap plan that pays for Medicare’s deductibles and co-payments, if you elect traditional Medicare coverage.
  • Taking care of your health by quitting smoking, exercising more, improving nutrition, losing weight and managing your stress. It’s a tall order, but it might help. Chronic conditions that require prescription drugs are often responsive to lifestyle remedies.
  • Becoming a savvy medical consumer by exploring all your treatment options with your physician and other medical professionals.
  • Working for awhile at an employer that offers employee medical coverage.

Low-income retirees might also be eligible for Medicaid, depending on the state they live in.

One great way to save for medical expenses in retirement is with a Health Savings Account (HSA), which has a triple tax advantage:

  1. Contributions are tax-deductible
  2. Investment income on your contributions accumulate tax-free
  3. You don’t pay taxes on withdrawals if you use them to pay for qualified medical expenses

However, you’re eligible to contribute to an HSA only if you participate in a high-deductible medical plan (a deductible of at least $1,300 for a single person and $2,600 for family coverage). The maximum amount you can contribute to an HSA in 2016 is:

  • $3,350 for single coverage
  • $6,750 for family coverage
  • A $1,000 catch-up contribution if you’re 55 or older

HSAs won’t solve the soaring medical costs for American retirees, however, as some politicians have recently suggested. EBRI reports that the average account balance in an HSA for 65-year-old workers was $5,016 at the end of 2014. That’s just a pocket change compared to the $260,000 goal. 

The thing is, HSAs haven’t been around long enough for current older workers to accumulate significant amounts, but they can be an effective tool for younger workers to save for their future medical expenses. 

Many people aren’t aware that Medicare doesn’t cover most long-term care expenses, which is most often custodial care when you’re frail, including help with daily living activities such as bathing, preparing food, administering medications and using the bathroom. Medicare primarily covers medical treatments and services only. 

Fidelity estimates that in addition to $260,000 for retiree medical expenses, a 65-year-old couple would need $130,000 to insure against long-term care expenses. This assumes the couple is in good health and purchases a long-term care insurance policy with $8,000 monthly maximum benefit, up to three years of benefits and an inflation adjustment of 3 percent per year.

Most people don’t purchase long-term care insurance, however. In this case, they may want to keep home equity in reserve to tap in case they incur significant long-term care expenses.

Fidelity’s estimates also don’t include over-the-counter medications, most dental expenses and vision care. If you’re an older worker approaching retirement and are currently covered by dental or vision insurance as an active employee, you’ll want to make sure you get any necessary work completed before retiring.  

Here’s the bottom line: If you’re retiring in your mid-60s, you and your spouse, if you’re married, could be facing 30 years or more of medical expenses. For most people, this will add up to a lot of money. This is one very good reason to take the time to carefully assess the adequacy of your retirement resources and consider working part-time while in your 60s or 70s to cover as many expenses as possible.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.