Knowing what to expect can help you avoid financial stress.
Many people think that their overall cost of living will decrease when they quit their job, but health care costs subtly increase in retirement. That’s natural. This is because as people age, they tend to develop health problems.
Unfortunately, many Americans underestimate their health care costs in retirement. And that can derail their finances.
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Fidelity estimates that the average retirement medical expense for a 65-year-old retiring this year is $165,000. But the average American estimates they will spend about $75,000 on health care costs during retirement, less than half of the $165,000 calculated by Fidelity.
The reality is that your health care costs during retirement are largely determined by your health status. However, here are some common expenses that all retirees face.
1. Medicare premiums
It’s a big myth that Medicare coverage is free. Most enrollees do not pay Part A premiums for inpatient treatment, but there are monthly premiums for Part B, which covers outpatient treatment. The same goes for Part D drug plans and Medicare Advantage plans (though in some cases, these premium plans can cost $0).
The standard Medicare Part B monthly premium for 2024 is $174.70. However, you should also know that high-income earners will pay more than this amount.
2. Medicare Deductible
People with Medicare are subject to an annual Part B deductible that changes annually. This year, it’s $240.
It’s not that terrible. However, where a potential problem can arise is the inpatient medical expense deduction that applies to Medicare Part A.
This year, your out-of-pocket cost for a single hospitalization could be $1,632. And this only covers the first 60 days. If you exceed that amount, you will have to take out expensive co-insurance.
3. Services not paid by Medicare
You may think that once you enroll in Medicare, all your medical costs will be covered by Medicare. it’s not.
Medicare does not pay for teeth cleanings, eye exams, or hearing aids. If you want coverage for these services, you’ll need to sign up for a Medicare Advantage plan.
However, enrolling in Medicare Advantage can have drawbacks, such as being limited to a narrow provider network. So it’s not necessarily a good solution.
Let’s get ready and enter
Now that you know what medical costs to expect in retirement, you can take steps to plan accordingly. And if you’re eligible, one of the things you should do before you retire is fund a Health Savings Account (HSA).
With an HSA, contributions are deposited on a pre-tax basis, just like a traditional 401(k) or IRA. But from there, you can invest and grow the money tax-free if you don’t use it right away. HSA withdrawals are also tax-free when used for qualified medical expenses.
You may have heard that HSAs are not compatible with Medicare coverage. But that’s not the case.
If you enroll in Medicare, you cannot contribute to an HSA. However, as a Medicare enrollee, you can use your HSA to pay for a variety of medical expenses.
Of course, not everyone can get an HSA. If your health insurance plan doesn’t allow you to contribute to an HSA, you can always increase your 401(k) or IRA instead.
However, it’s important to note that when you retire and transition to Medicare, you may incur a number of medical expenses. And it’s important to have a plan in place to cover them so you’re not left with a mess after you quit your job.
