Retirement: Don't Forget Health Costs When Planning for Retirement

By Eileen Ambrose and Kimberly Lankford, Kiplinger's Personal Finance | April 5th, 2018

Health care isn’t cheap while you’re working, and it can continue to consume your budget even when you’re retired and covered under Medicare.

When you add up the expenses, Fidelity estimates that the average couple retiring at age 65 in 2017 will spend $275,000 on health care costs, including Medicare premiums and out-of-pocket expenses, or coverage to fill the gaps, over 21 years or so.

“People very, very much underestimate how much they may need,” says Katie Taylor, vice president of thought leadership at Fidelity.

Here are some tips to make sure health costs don’t sidetrack your retirement:

One of the biggest expenses in retirement is long-term-care. Last year, the average private room in a nursing home cost $97,500; assisted living cost $45,000; and the average home health aide charged $22 per hour (which would total $64,000 a year for eight-hour shifts every day), according to the Cost of Care study by Genworth, a long-term-care insurer.

Long-term-care coverage isn’t onerously expensive if you don’t buy a Cadillac policy. It would cost a 55-year-old couple about $3,000 per year to buy two policies, each providing a spouse with a $150 daily benefit, a 90-day waiting period before benefits begin, a three-year benefit period and a 3 percent inflation adjustment, according to the American Association for Long-Term Care Insurance. You could also buy a hybrid life insurance policy that allows you to spend down the death benefit to pay for long-term care should you need it.

Otherwise, you need to have a plan to pay the potential costs from your savings. Some people buy a deferred-income annuity that pays lifetime income starting in their late seventies or early eighties, when it’s more likely they will need care.

You should also plan for other medical bills in retirement, even after you are on Medicare. Consider setting up a tax-friendly health savings account now. An HSA gives you a triple tax break: Contributions are tax-deductible (or pretax if made through your employer), the invested money grows tax-deferred in the account, and then you can use it tax-free for eligible expenses in any year.

To qualify, you must have an HSA-eligible health insurance policy with a deductible of at least $1,350 for single coverage or $2,700 for family coverage this year. You’ll get the biggest benefit if you can afford to use other cash for current medical expenses so you can allow the money to build up in the HSA for Medicare premiums or other medical bills in retirement. Once you enroll in Medicare, you can’t make additional contributions to the HSA.

Eileen Ambrose is a senior editor and Kimberly Lankford is a contributing editor to Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit Kiplinger.com.