Just like your wedding day or the day your child is born, retirement is a huge and exciting milestone — but it can also be terrifying.
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Retirement is full of unknowns — namely, the uncertainty surrounding whether you’ll have enough money to last through retirement. In fact, 76% of baby boomers are worried they haven’t saved enough, according to an Insured Retirement Institute survey.
Because money is a major concern for soon-to-be retirees, many people think a fatter wallet will solve all their retirement woes. But it turns out even wealthy people, just like the rest of us, are worried about retirement. And the No. 1 concern well-off Americans have about retirement? Healthcare costs.
Nearly three-quarters of Americans with over $1 million in investable assets said in a UBS survey that their health (and the costs involved in maintaining their health) was their top worry. Also, surprisingly, those earning over $75,000 per year are actually more concerned about healthcare costs than those earning less than $30,000 per year, according to a 2015 Bankrate study.
This could be at least partly because wealthier Americans don’t typically qualify for Medicaid, and if they’re wealthy enough to retire early, they won’t even have access to Medicare until they reach age 65.
Further, as healthcare costs continue to rise far faster than inflation, health issues can wipe out retirees’ savings — especially if they’re not covered by Medicare or other forms of insurance. In fact, the average 65-year-old couple retiring today can expect to spend over $275,000 during retirement to cover healthcare costs.
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One of the most frightening things about medical expenses is how fast they can add up. The average hospital bill after a fall (an injury for which 800,000 seniors are hospitalized each year) is over $30,000. Meanwhile, long-term care (such as nursing home care) is typically not covered by Medicare and can cost over $6,800 per month, or $81,600 per year, for a semi-private room.
Handling healthcare costs during retirement
You can’t completely prevent health issues from arising, but you can take steps to prepare for the costs.
One way to do that is through a health savings account (HSA). An HSA allows you to invest pre-tax dollars and then withdraw that money tax-free for eligible medical expenses. The idea is to use the money to help cover high deductibles and/or procedures that Medicare doesn’t cover (like routine dental care, eyeglasses or contacts, or routine foot care). To open an HSA, you must be enrolled in a qualifying high-deductible health plan (HDHP). Here are the requirements health insurance policies must meet to qualify as HDHPs in 2017:
| Minimum Deductible | Maximum Out-of-Pocket Medical Expenses | |
|---|---|---|
| Individual policy | $1,300 | $6,550 |
| Family policy | $2,600 | $13,100 |
An added benefit of an HSA is that it doubles as an additional retirement fund. While making withdrawals before age 65 for non-medical expenses will cost you a 20% penalty fee plus income tax, once you turn 65, you only have to pay income tax on non-medical withdrawals, and you can use that money for whatever you want. This makes it similar to a traditional IRA as a retirement savings vehicle.
For 2017, the contribution limits for an HSA are $3,400 per year for an individual and $6,750 per year for a family — and if you’re 55 or older, you’re allowed to save an extra $1,000 per year. Say, for example, you’re contributing $2,000 per year to an HSA starting at age 40. If you earned a 6% annual rate of return (which is a bit lower than the historical average return of the stock market), then by age 65 you’d have over $116,000 saved.
Long-term care insurance is another option. There’s a 70% chance a person turning 65 today will need long-term care at some point in life, according to the U.S. Department of Health and Human Services, but Medicare typically doesn’t cover long-term care unless it’s medically necessary.
The downside is that premiums for long-term care insurance can be high (and they skyrocket if you wait until age 65 to sign up), and they can cost you thousands of dollars per year. But you can use HSA funds to pay for those premiums to take advantage of the tax break, and if you’re truly worried about high healthcare expenses, it may be worth considering long-term care insurance to help with those costs.
Planning for retirement isn’t easy, and even those with hefty retirement funds can’t escape all the worries. But by thinking about healthcare costs before you retire and coming up with a savings plan specifically for these expenses, you’ll be able to enjoy your golden years without worrying that health issues will crack your nest egg.
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