Health Care Costs on the Rise

Health care costs are projected to increase by an average of 5.4% annually¹ in the coming years, potentially reaching over $7 trillion by 2031². This rate of growth is expected to outpace the overall economy.

Given these anticipated cost increases, Social Security’s cost-of-living adjustments may struggle to keep up, especially with ongoing funding uncertainties. Moreover, advancements in medical technology are extending lifespans, and life expectancies are generally increasing.

Despite these challenges, more than three-quarters of retirees and nearly two-thirds of workers are confident they will have enough funds to cover medical expenses in retirement³. Additionally, about a quarter of retirees are setting aside money specifically for health and long-term care expenses.

However, the reality is that health care costs can significantly impact retirees’ savings. For couples that retired in 2022, lifetime health care costs could total $683,306⁴, driven by inflation, rising medical costs, a fragmented U.S. health care system, and a declining number of hospitals.

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Strategies to Mitigate Health Care Costs Before Retirement

Adopting a healthy lifestyle is one way to reduce health care costs as you age. Maintaining a balanced diet and regular exercise are key, but sleep and stress management are also crucial. Stress, often stemming from career pressures, family responsibilities, and other areas, can significantly impact health. Finding effective ways to manage stress, such as through exercise, is essential.

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Planning for Health Care Costs

Another strategy is to consider future health care costs as a certainty rather than a possibility. Early saving can ease the burden of these expenses when they arise. Employer-provided workplace savings plans, such as IRAs and 401(k) plans, are common retirement saving options. These accounts often come with restrictions on early withdrawals and employer matching contributions.

Health Savings Accounts (HSAs) offer another valuable option. To qualify, you need a high-deductible health plan (HDHP), which has lower monthly premiums than traditional insurance policies. HSAs are funded with pre-tax dollars, making out-of-pocket medical expenses more affordable. Unused funds roll over year to year and can earn interest, unlike flexible spending accounts.

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Benefits of HSAs

HSAs offer several tax benefits. Account balances grow tax-free, and contributions are tax-deductible. Employer contributions are not included in taxable income. Withdrawals for qualified medical expenses are also tax-free. However, non-qualified withdrawals incur a 20% penalty and income taxes. Contributions stop at age 65 when Medicare eligibility begins, so maximizing contributions before then is beneficial.

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Investment Strategies for HSAs

HSAs have flexible investment options similar to IRAs, though offerings vary by administrator. It’s important to select an HSA with suitable investment opportunities.

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Considering Health Care Variables

Planning for health care costs requires considering various factors, such as increased life expectancies and preexisting conditions. Understanding personal health care usage, such as frequent doctor visits, is also crucial. Uncertainty around longevity, interest rates, investment returns, public policy changes, and health status underscores the importance of careful planning.

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Funding Strategies Within Retirement

Medicare is a primary funding option for health care in retirement, divided into parts covering different health care aspects. Medicare Part A (hospital insurance) often requires no monthly premium for those who have paid federal taxes during their working years. Medicare Part B (medical insurance) covers outpatient care and requires a monthly premium based on income. Medicare Advantage (Part C) includes private plans approved by Medicare, requiring enrollment in Parts A and B and continued payment of Part B premiums. Medicare Part D covers prescription drugs, with premiums determined by income.

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Enrolling in Medicare

Medicare enrollment has specific steps to avoid penalties or gaps in coverage. Initial enrollment starts three months before turning 65 and ends three months after. A general enrollment period runs from January 1 to March 31 annually for those who meet certain criteria, with coverage starting on July 1. Medigap policies, which supplement Medicare, require enrollment in Parts A and B and payment of monthly premiums.

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Factoring in Social Security and Employer Coverage

Social Security often supplements retirement income, including health care costs. Some retirees may retain health care coverage through former employers, though benefits and premiums can change. Understanding coverage details and integration with Medicare is important.

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Be Prepared

Retirement should be a time of relaxation and enjoyment, free from financial worries. Planning for potential health care costs is crucial. Consider creating a health care directive or assigning a power of attorney for medical decisions. Discuss health-related issues with family and work with a wealth advisor to develop a comprehensive plan for a comfortable retirement.

By staying informed and prepared, you can better navigate the uncertainties and challenges of health care costs in retirement.

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Sources:

1 CMS Office of the Actuary Releases 2022-2031 National Health Expenditure Projections

2 Healthcare Spending Will Be One-Fifth of the Economy Within a Decade

3 2023 Retirement Confidence Survey

4 2022 Retirement Healthcare Costs Data Report Brief

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