Medicare and Your Retirement

There’s no way around it. We are all getting older and that means we’re all going to need more medical help in our later years. Yet many people don’t factor medical expenses into their retirement expenses.

Now’s a good time to change that, and the first step is to understand Medicare, the U.S. government’s insurance program for people 65 and older. With Medicare, your expenses are controlled but that doesn’t mean they’re low. Here’s what to know to help you budget effectively for healthcare in retirement.

Medicare Components and Costs

Medicare is broken into three types of coverages.

• Part A: Covers hospital stays and inpatient care.
• Part B: Covers general medical services like doctor visits and outpatient care.
• Part D: Covers prescription drugs.

Medicare Advantage, also called Part C, is a private plan that combines Parts A and B—and often Part D—into one package. In other words, instead of signing up for each part separately, you can choose a Medicare Advantage plan that bundles hospital, medical, and sometimes prescription drug coverage. Many of these plans also include extras like dental, vision, and hearing care, depending on the provider.

For many retirees, Medicare expenses account for about 30% of their monthly budget, so it’s important to plan for these costs to keep from running out of money in retirement.

Budgeting for Rising Costs

Healthcare costs typically rise twice as fast as overall inflation, which means you should plan for 5-6% increases each year for both premiums and out-of-pocket expenses. On top of that, you should consider budgeting for big-ticket items such as hearing aids, dental work, or home renovations to make your house more accessible.

Supplemental coverage options can help reduce your healthcare expenses by smoothing out years when costs are especially high. Medigap—extra insurance that helps pay what Medicare doesn’t, like copays and deductibles—can fill those gaps, while some Medicare Advantage plans can help simplify costs while offering additional benefits.

Regardless of how you set up and manage Medicare, make sure to revisit your plan each year because plan provisions can change and your needs are likely to change, too.

Budgeting Mistakes to Avoid

Many people who don’t pay close enough attention to their healthcare costs after retirement find that their savings don’t stretch as far as they expected. Avoid these healthcare budgeting mistakes to help your retirement dollars go further.

• Underestimating health usage: Doctor visits become more frequent later in life, so do ailments that could require surgery, medications, or ongoing care.
• Ignoring big-ticket items: Hearing aids can cost thousands, dental work adds up quickly, and home safety modifications such as grab bars, ramps, and walk-in showers can get expensive.
• Not planning for inflation: Over time, the price of everything goes up. The withdrawals you take at 65 won’t go as far when you’re 75 or 80, so if your retirement income looks tight now, it will only get tighter each year.
• Not accounting for bridge coverage if you retire early: If you retire before you’re eligible for Medicare, you’ll need health coverage. You can shop for coverage on the Affordable Care Act marketplace. These plans are likely to cost more than Medicare.

Health Savings Accounts

Many people create a separate account for healthcare savings that allows them to invest and grow their savings. These are called health savings accounts, or HSAs.

An HSA is like a retirement plan for your health expenses. You invest in mutual funds through your HSA and receive tax benefits as your investments grow. Then, when you have major medical expenses, you can pay for them with your HSA. You can also withdraw the money for other expenses, but if you’re under 65, you’ll pay a penalty. However, at 65 and older, you can take withdrawals for any reason without penalty.

Whether you’re using an HSA or simply planning to pay for health expenses using your retirement plan, what’s important is getting ahead of rising costs and making sure you have enough money to take care of your needs and live comfortably in retirement.

What You Can Do Now

Planning for healthcare costs doesn’t start at age 65—it starts today. Here are a few steps you can take now to prepare:

• Estimate your future costs: Use online calculators or talk to a retirement specialist to get a sense of what healthcare might cost in retirement.
• Boost your savings: If your employer offers a Health Savings Account (HSA), contribute as much as you can. HSAs grow tax-free and can be used for medical expenses later.
• Review your retirement plan contributions: Increasing your 401(k) contributions now can give you more flexibility to cover rising healthcare costs later.
• Learn your options: Familiarize yourself with Medicare, Medigap, and Medicare Advantage so you’re ready to choose the coverage that fits your needs when the time comes.
• Plan for inflation: Healthcare costs rise faster than general inflation, so build that into your long-term budget.

Taking these steps now can help you avoid surprises and feel confident about your healthcare plan when you reach retirement.

Our Team Is on Your Side

We can help you plan for healthcare expenses as part of your overall retirement savings strategy. Talk to one of our Retirement Specialists to help you get your savings on track so you can enjoy a long, healthy retirement. Contact us at 888-322-7586 or contact401k@frs.net today!