July 19, 2018
Planning for retirement can at times be like chasing a moving target; major life events, stock market movements and changes in legislation all have the potential to derail even the most detailed plan. Adding to these uncertainties, rising healthcare costs are an ever-growing source of concern for many current and future retirees. According to the 2017 Retirement Health Care Costs Data Report released by HealthView Services, retiree healthcare expenses are expected to rise at an average annual rate of 5.5% for the foreseeable future—almost triple the U.S. inflation rate from 2012-2016. And, a 55-year-old couple retiring in ten years will need up to 92% of their Social Security benefits to cover healthcare costs in retirement.
Although these projections may create feelings of anxiety for many people hoping to retire someday, a financially secure future is still within reach if you have time until retirement. By understanding what Medicare—your “primary” healthcare insurance provider after age 65—will and will not cover, you can plan for any additional medical costs in retirement by adjusting your savings rate accordingly.
Medicare. Medicare is not the all-encompassing coverage for healthcare that many people assume it is. While it covers many costs, Medicare does not provide coverage for dental, vision or hearing conditions, or long-term care among other things, meaning these services must be paid out-of-pocket or by a separate health insurance plan. Even services covered by Medicare generally require the patient to pay a deductible, coinsurance and copayments. Needless to say, costs can add up very quickly.
Fortunately, there are strategies you can apply to help reduce these costs. The first is utilizing a health savings account (HSA) to set aside additional savings for medical expenses. The other is purchasing long-term care insurance to protect you and your family against the potentially exorbitant cost of skilled care.
Health savings accounts (HSAs). HSAs allow individuals to save money on a pre-tax basis to pay for qualified medical expenses and are used in conjunction with high-deductible health plans (HDHPs) to offset out-of-pocket costs. Additionally, any earnings you accrue on the dollars you contribute to your HSA are tax-free, as long as these funds are used for approved medical expenses, and funds roll over each year if they are not spent.
For 2018, the IRS defines HDHPs as having a minimum annual deductible of $1,350 for individual coverage and $2,700 for family coverage. If you have a high-deductible health plan and are eligible for an HSA, contributing to an HSA can provide advantages similar to an individual retirement account, by allowing you to save and grow your money without being taxed. If you choose to invest funds in your HSA, this benefit can lead to a meaningful difference in savings when you enter retirement.
Long-term care insurance. Many people need additional services beyond traditional healthcare in their retirement years. Medicare does not cover costs associated with everyday personal care assistance—in other words, help with the activities of daily living such as bathing, dressing or eating—or nursing home care. Most private insurance plans tend to follow Medicare’s guidance on long-term care.
If you anticipate needing long-term care in retirement or simply want additional financial protection for yourself and your family, you can purchase long-term care insurance to cover the associated costs. However, if you are in poor health or are already receiving long-term care, you may not qualify for insurance, which makes long-term care an important consideration during your retirement planning years.
If you are approaching retirement, the best way to plan for future medical expenses is to build up your financial reserves. If you are unsure how much money you’ll need, start by creating a retirement budget that includes realistic estimates of your medical expenses and see how they stack up against your savings. Depending on the progress you have made so far, you may need to increase your savings rate to cover the difference. Additionally, talk to your financial advisor about whether an HSA or long-term care insurance makes sense within your overall financial plan. Although many expenses in retirement are uncertain, the earlier you start planning, the more likely you are to achieve the financially secure retirement you desire.
Cathy Schnaubelt is a senior wealth strategist for CIBC Private Wealth Management's Houston office, with more than 35 years of industry experience. In this role, Cathy is responsible for the development of integrated wealth management solutions and provides comprehensive estate and financial planning services to high net worth clients.
This article originally appeared on Forbes.com on June 6, 2018.
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