How to Plan for Health Care Costs in Retirement
Key Points
Proper planning and preparation for health care costs are crucial for a more comfortable and financially secure retirement.
Arming yourself with knowledge about why costs are rising, your own personal health care needs, and payment options puts you in a position to better handle costs when they occur.
Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) are two strategies to leverage well before you reach retirement age.
If you’re approaching retirement, one of the biggest concerns you probably have is how to manage rising health care costs. The good news is we’re experiencing longer life expectancies and advances in medical technology. The bad news is health care costs have steadily increased.
Health care expenses can quickly become a burden, even for individuals with substantial savings and investments. Understanding the health care costs associated with retirement helps us develop a comprehensive plan to help ensure you maintain your desired standard of living.
Understand Health Care Expenses in Retirement
First, understanding your potential basic health care costs is important. Medicare is the primary health care program for most retirees in the United States. It doesn’t cover all medical expenses, however, which is where Medigap policies can come in. You may also want a prescription drug plan, which is often necessary to fill the gaps in coverage and manage out-of-pocket costs.
As we age, the likelihood of requiring long-term care services increases. The costs associated with nursing homes, assisted living facilities, and in-home health care can be staggering. It's essential to understand these expenses and plan accordingly.
Even with comprehensive health care coverage, unexpected medical events can result in significant out-of-pocket expenses. Copays, deductibles, and non-covered services can quickly add up, potentially putting a strain on your retirement savings.
Why Are Health Care Costs Rising?
Many factors influence health care costs. At the time of this article, health care industry has experienced higher rates of inflation compared to other sectors. This means that health care costs tend to rise faster than the overall rate of inflation, making it more challenging to keep up with expenses over time.
While advances in medical technology have led to improved treatments and better quality of life, they often come at a higher cost. New drugs, medical devices, and procedures can significantly impact health care expenditures.
The baby boomer generation is the second-largest (after the millennials), and they’re aging. As people age, the demand for health care services increases. This demographic shift puts pressure on health care resources, driving up some costs for retirees.
Evaluate Your Personal Health Care Needs
Taking an honest look at your own personal health care needs (and those of your family) can be a helpful first step. Your health care needs depend on various factors, including your current health status, family history, and lifestyle choices. Understanding these factors can help you better estimate your future health care expenses.
Evaluating your potential need for long-term care services is crucial in retirement planning. Consider factors such as family support, living arrangements, and personal preferences to determine the level of care you may require.
Health care costs can vary significantly depending on your location. Be aware of regional differences in medical expenses, as well as the availability and quality of health care services in your desired retirement destination.
Strategies to Manage Health Care Costs in Retirement
While everyone’s financial situation and goals are different, there are some strategies most of us will want to consider. Tax-advantaged accounts like Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) can help you save and pay for qualified medical expenses with pre-tax dollars, reducing your overall health care costs. These are accounts you can leverage today. In particular, investing in an HSA is one of the most underutilized yet most effective investments available.
As retirement nears, you can evaluate the differences between Medicare Advantage plans and Medigap policies to determine which option best suits your needs and budget. Consider factors such as premiums, copays, and out-of-pocket maximums.
Long-term care insurance can provide financial protection against the high costs of long-term care services. However, it's essential to weigh the premiums and coverage options carefully to determine if it's a worthwhile investment for your personal situation.
One action everyone can take is committing to a healthy lifestyle. This includes prioritizing preventive care. Regular exercise, a balanced diet, and routine check-ups can potentially prevent or delay the onset of chronic conditions. Taking care of our physical and mental health before retirement can help reduce your health care expenses once you’re in retirement.
Build a Comprehensive Financial Plan
At Capstone, our financial plans are personal. They consider more than just costs — we want to know your desired retirement lifestyle. This helps us proactively adjust based on what we think will meet your goals. Logistically, we’ll look to implement investment strategies that can help your portfolio outpace inflation and preserve your purchasing power. Diversification and asset allocation can play a crucial role in mitigating the impact of rising health care costs.
Women often need to plan for retirement differently than men, because to gender pay gaps and caregiving responsibilities. For anyone, proactive planning is key. Some of your best retirement strategies should take place in your prime earning years.
With careful planning and a proactive approach, we can help you navigate the complexities of health care costs and ensure the retirement you want. By taking the necessary steps today, you can enjoy peace of mind and financial stability in your golden years.
Disclosures:
This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review by contacting us at capstonefinancialadvisors@capstone-advisors.com or (630) 241-0833.