Saving for Healthcare Costs in Retirement

Woman with clockFinancially preparing for retirement requires a great deal of calculation. You need to determine expenses ranging from housing and food to taxes and leisure activities. However, one of the biggest expenses in retirement is the cost of healthcare. While many people believe that Medicare, which is available to people age 65 and older, will cover their healthcare costs, the Employee Benefits Research Institute (EBRI) reports that the government-sponsored program will only pick up about 60% of the healthcare cost tab, not including long-term care expenses.1

Since overall healthcare spending in retirement can be significant, it’s important to provide for it in retirement saving and investing plans. Research released in May 2013 from the Society of Actuaries (SOA) using data from the Health Care Cost Institute (HCCI) estimates that total retiree healthcare costs average $146,400 for someone age 65 who lives 20 more years. Those who retire a decade earlier might incur an average total cost of $372,400 by age 85. These costs may include Medicare premiums, prescriptions, copays, premiums for insurance plans that cover costs not paid by Medicare, or other out-of-pocket expenses. For those with chronic or serious health conditions, the cost can increase significantly.2 Fortunately, there are a number of ways to prepare and save for healthcare costs in retirement.

Estimate your costs. To properly prepare for these expenses, you should first have a solid estimate of how much you will need to cover your post-retirement health expenses. Age, personal and family medical history, and other factors affect this calculation, so it’s often a good idea to work with a financial advisor who can help you determine a solid estimate for your circumstances.

Review employer benefits. Employer-provided retirement benefits for healthcare are becoming increasingly scarce. EBRI found that the overall percentage of non-working retirees with health coverage from a former employer dropped to 16% in 2010 from 20% in 1997.3 However, it’s important to determine any eligibility you might have, especially if you’re a longtime employee and benefits policies may have changed during your employment period. Any benefits to which you are entitled could reduce the amount you need to save to cover costs.

Maximize retirement savings plans. Choosing from the array of employer-provided retirement plans, traditional and Roth individual retirement accounts (IRAs), and self-employed retirement saving vehicles that might be appropriate for you can be confusing. However, deciphering the best options for you is critical to maximizing your overall retirement savings, including the money you will need for healthcare expenses. Contributing to your workplace 401(k) or 403(b) could also provide a bonus: Some employers match your contributions up to a specific amount. In addition, both traditional and Roth IRAs provide tax-advantaged ways to save: Individual IRA contributions may reduce your taxable income up to allowed thresholds while Roth IRA contributions are not tax deductible, but distributions may be free from federal and state tax withholding if you meet certain requirements.4 In 2013, IRA contribution limits are $5,500 for people below age 50 and $6,500 for people age 50 and over.5

Open a retirement healthcare plan account. Programs such as a Retiree Health Savings Plan may be available through your employer. These tools offer a tax-advantaged way to save for healthcare-related expenses in retirement. You can use funds from your retiree health account to cover qualified out-of-pocket medical expenses such as copayments for medical services, plan deductibles, prescription drugs, retiree insurance premiums, and other qualifying expenses. Check with your employer to see if this type of program is available to you and work with your financial advisor to determine whether and how this program fits into your overall retirement plan.

Take advantage of HSAs. Created by Congress in 2004, Health Savings Accounts (HSAs) can be established when the individual has a high-deductible health insurance policy. Unlike flexible spending arrangements (FSAs), which have a “use it or lose it” restriction requiring account balances to be used only to cover qualifying expenses incurred during the year (or 2½ months following year end depending on plan terms), HSA balances can be rolled over from year to year.

In 2013, individuals with high-deductible policy coverage can contribute up to $3,250 to their HSA plans, while families covered under such policies can contribute up to $6,450. Some HSA plans allow for account holders to invest their contributions in mutual funds, so check with your employer to see if you have this option. These contributions grow tax-deferred, and can be used to pay qualified medical expenses at any time before or after retirement, although you cannot continue to make contributions once you’re enrolled in Medicare.6 Strategic use of an HSA is another way that you can save for retirement healthcare costs in a tax-advantaged way.

Know your benefits. Of course, as you get closer to retirement, it’s important to understand the Medicare and other benefits to which you’ll be entitled. Since such coverage, deductible and benefits totals change regularly, you’ll need to keep your individual circumstances in mind and adjust your saving totals and vehicles appropriately. Again, it’s a good idea to work with a reputable financial advisor to determine your eligibility and expected expenses so you can properly plan for meeting your healthcare needs in retirement.

Save by shopping around. Retirees may also save a great deal of money by simply shopping around for healthcare services. The Centers for Medicare and Medicaid Services (CMS) report that healthcare service pricing can vary by many multiples depending on the provider. The CMS reports that average inpatient hospital charges for services that may be provided to treat heart failure range from $21,000 to $46,000 in Denver, Colorado, and from $9,000 to $51,000 in Jackson, Mississippi.7 Ask your healthcare provider about the costs of services, tests, and other healthcare expenses before you incur them.

Need Financial Help?

Phone ringing Call us 800-842-2888

Phone with arrowSchedule a callback

Circular people graphicAttend a meeting or seminar 

Experiencing a Life Event?

Tools & Calculators

See all 

Simplicity, flexibility and choice

A TIAA-CREF brokerage account offers thousands of investment options.

Learn more

C10886