Health care can be one of the biggest expenses a person faces in retirement. A typical retired couple aged 65 in 2022 can expect the following medical expenses at $315,000, according to Fidelity Investments’ annual estimate of retiree health care costs.

This amount does not include additional costs for long-term care, over-the-counter medications, or most dental services. Long-term care costs, in particular, can be high, with the average annual cost of a single room in a nursing home in 2021 being $106,920, according to long-term care insurer Genworth.

Many people are not mentally or financially prepared for the high costs of medical care retirement. Whether you’re starting your career, approaching retirement, or already transitioning out of the workforce, it’s important to understand and plan for rising health care costs.

Key conclusions

  • The typical 65-year-old retired couple will face $315,000 in subsequent health care costs in 2022, not including dental work or long-term care.
  • Medicare may pay for some medical services in retirement, but it does not cover them in full.
  • HSAs and long-term care insurance can help consumers prepare for these costs.

Inclusion of health care in the pension budget

Your total pension budget depends on two things: how much money will come in each month and your total expenses.

Only 51% of adults age 60 and older believe that theirs retirement savings are on the way. On average, people age 65 and older spend $4,185 per month. However, in 2022 Social security only paid a maximum monthly benefit of $3,345 to those who retired at full retirement age.

Of course, it’s important to recognize that Social Security is only for application pension savings: Social Security Administration (SSA) reports that Social Security replaces an average of 40% of pre-retirement income.

However, the fact remains that you will likely have to look beyond Social Security and other sources to cover your medical expenses. How much retirement income you plan to set aside for health care depends largely on your age and general health. “The healthier we are in retirement, that usually means less money will be allocated to health care costs,” says Chris Schaefer, head of the retirement plan practice at MV Financial. “The flip side of the coin is that with a healthier lifestyle, life expectancy will be longer, and thus retirees should plan for longer retirements.”

What Medicare does (and doesn’t) cover

Medicare does not cover long-term care. The program will cover some health care costs in retirement, but with limits, according to Michael Gerstman, founder and financial advisor of Gerstman Financial Group. “For example, without a Part D prescription drug policy, Medicare does not cover drugs.”

Original Medicare plans, also called Parts A and B, do not cover dental care and vision care, but Medicare Advantage plans usually do. If you plan to rely on Medicare to cover medical expenses in retirement, you’ll need to budget for deductibles, awardsand other out-of-pocket expenses.

For 2023 stationary franchise for Medicare Part A (which covers hospital stays and procedures) is $1,600, up from $1,556 in 2022. Standard monthly part B premium (which covers doctor visits and outpatient care) is $164.90, down from $170.10 in 2022, although some Medicare beneficiaries will pay more based on adjusted gross income. The annual Part B deductible for 2023 is $226, up from $233 in 2022.

Part D plan premiums vary by income, but the 2023 average base premium for standard Part D coverage is estimated to be $31.50 per month, down from $32.08 in 2022.

Offer from private insurers approved by Medicare Medicare Advantage plans. These plans generally cover the same costs as Medicare and provide Part D prescription drug benefits. Depending on the insurer and what the policy covers, a Medicare Advantage plan may cost less than Original Medicare. Some plans may also expand coverage to include costs related to vision, teeth, and hearing.

If you don’t have one coverage of dental expenses through Medicare Advantage, you may also consider a stand-alone dental insurance plan. Many plans focus on the types of coverage that seniors may need, including crowns, root canals, dentures and tooth replacements.

Look beyond retirement savings to pay for health care

The medical expenses associated with climbing don’t have to get you down nest egg. There are two ways pre-retirees can build a safety net for health care expenses in retirement.

Health Savings Account (HSA)

If you’re not already enrolled in Medicare, you can save money on your retirement health care costs with help health savings account (HSA). They are available from high deductible health plans (HDHP) and offer triple tax benefits:

  • Franchise contributions
  • Delayed tax increases
  • Tax-free withdrawal of qualified medical expenses

HSA funds can be used to pay certain medical expenses, including Medicare premiums and long-term care insurance premiums.

Those in their 50s can still maximize these plans by taking advantage catch-up contributions and employer contributions. Individuals age 55 and older may make a catch-up contribution of $1,000 per year in addition to the maximum contribution limit. You can use your HSA for preventive screenings, such as mammograms or annual exams, that are covered by your HDHP.

In 2022, the regular HSA deduction limit is $3,650 for individual coverage and $7,300 for family coverage. These limits apply to the combined contributions of the employee and the employer. Keep in mind that those enrolled in Medicare can no longer make new HSA contributions.

Long-term care insurance

Buying long-term care insurance this is another way to fill the gap left by Medicare. This type of policy can pay a monthly long-term care benefit either for a specific period of time (usually two to five years) or for life.

Long-term care insurance premiums may not be available to everyone. Gerstman says the alternative is to buy a life insurance policy which has the option of adding a long-term care insurance rider. “It allows young people to get ahead of the curve on long-term care planning,” says Gerstman. That’s because the earlier you buy life or long-term care insurance, the lower the premiums will be.

Bottom line

Health care costs can easily be a large portion of a retirement budget. Evaluation of these expenses and creating a spending strategy can help preserve more of your retirement assets for other expenses.

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