Healthcare Costs in Retirement – Avoid These Big Mistakes

Many of us don’t think about retirement or saving for it until it’s too late.

When we do save, we plan for money to cover rent, utilities, groceries, and insurance. However, many people overlook saving for healthcare costs in retirement.

This is by far one of the biggest mistakes you can make during your time preparing and saving for your later years.

Since there is so much information out there on how you should prepare for retirement, it’s essential to understand and recognize the myths associated with retirement saving. So you don’t end up paying for it later when you're on a fixed income.

Biggest Myth: Medicare Costs Nothing

It’s a common belief among people under 65 that Medicare will take care of all their healthcare expenses in retirement.

Most American’s who don’t put in the adequate research into retirement preparation enter retirement thinking Medicare will be entirely free for them.

As hard-working citizens, we have also noticed throughout the years that our employers have deducted money for Medicare from our paychecks.

We assume these payroll taxes will support all our medical expenses once we enter retirement.

Unfortunately, that's far from the truth. What many workers don’t realize is that your payroll taxes only go toward your future hospital benefits under Medicare.

In actuality, when you later sign up for Medicare upon retirement, you will find you have to pay regular monthly premiums for both Part B and Part D coverage in addition to hospital and outpatient deductibles and coinsurance.

Your share of expenses under Medicare will be very similar to your share of healthcare expenses under your insurance coverage now.

This myth – the Medicare is free myth, will absolutely consume your retirement savings if you let it.

Mistakes that Will Greatly Impact Your Retirement Savings

To be as prepared as possible for your healthcare costs in retirement, let’s address some common mistakes you'll want to avoid making during your retirement saving process.

Failing to Account for Healthcare Usage

Many financial advisors will be reluctant to ask you about your personal health information or any health conditions you may have. Therefore, it’s vital you mention it if they fail to do so.

You don’t need to go as in-depth as you would if you were discussing your health with your doctor. But any information you can provide about potential medical conditions will help your financial planner greatly when helping you prepare for those healthcare expenses during your golden years.

People with chronic health conditions will have higher medical expenses during retirement.

So if you are a heavy user of your medical benefits, you’ll want to be sure you save enough to pay for adequate Medicare supplement coverage.

If you don’t have a financial advisor, consult a Medicare insurance broker to get estimates for what you can expect to spend on monthly Medicare premiums and supplement coverage during retirement.

Be sure to adjust for inflation if you are some years away from retirement.

Thinking Your Health Will Always Be Good

It isn’t the most uplifting thing to keep in mind, but we are human, and humans don’t live forever. We often experience some medical setback in our older years.

In many cases, people who develop unexpected illnesses are forced to begin their retirement benefits before they expected to.

A lot of people also don’t expect for themselves to fall chronically ill — a big mistake for those who actually do later on down the road.

Chronic illness is a significant expense in healthcare spending and can take a big chunk out of your savings.

It’s always better to be safe than sorry, so don’t assume you will be in good health for the rest of your life. Make backup plans in case you need them.

Counting on Continued Employment

It’s unfortunate, but sometimes older workers can have a hard time finding stable work in today’s job market.

If you're laid off unexpectedly in some of your later years but still sooner than you planned to retire, it’s important to be prepared and know you may not get hired someplace else right away.

It’s never a bad idea to have a game plan on how to financially adapt if you suddenly lose your regular source of income and healthcare benefits.

Not Planning for Long-Term Care

Since Medicare does not pay for assisted living or nursing home care, it’s essential that you make arrangements to pay for your long-term care should you ever need it.

Assisted living can costs thousands of dollars each month, and on average, one in two people will end up needing it.

Plan to set aside money for this expense or look into a long-term care insurance policy now while you can qualify for one.

These policies are a great way to prepare and relieve your family of any burden of paying for care you may someday need.

Preparing for Healthcare Expenses in Your Golden Years

According to a Fidelity Investment report, a couple in retirement will need at least $280,000 saved to cover medical costs. That doesn’t include money you will have to set aside for rent, travel, and other living expenses.

One of the best retirement savings tools you can invest in is a health savings account.

A health savings account is a special retirement account for future medical expenses. Funds you contribute to your HSA are a tax write-off now, so it reduces your taxable income.

You use that money for qualified medical costs as they occur. These accounts are great ways to prepare yourself for any unexpected medical emergencies you may run into down the road.

For example, this year you can sock away up to $3,500 as an individual or $7,000 if you have dependents. Individuals who are 55 or older can take advantage of a special catch-up clause as well. They can contribute an extra $1,000 per year.

However, it's critical to note that when you reach 65 and enroll in any part of Medicare, you can no longer contribute money to your health savings account. Doing so will result in significant penalties with the IRS.

Also, in order to open a health savings account, you must be enrolled in a qualified high-deductible health insurance policy. Check with your employer to see if they offer this type of plan for you to enroll in.

Other Benefits of Health Savings Accounts

Now let’s look into more ways you can use health savings accounts to maximize the benefits for retirement preparation.

Money accumulating in your account can be used to cover the cost of various healthcare expenses, including dental, hearing and vision expenses.

You can use your HSA fund to pay for medical expenses incurred by your dependents as well.

One thing people like about HSA plans is that money contributed is not forfeited if not used in that year. Instead, it accumulates and earns interest.

Another cool benefit of having a health savings account is that once you reach 65 and have accumulated a lot of money in your HSA, you can take out money for ordinary expenses not health-related without penalty. You’ll just pay regular income tax on the amount that you withdraw.

Final Thoughts on Planning for Healthcare Costs in Retirement

Planning for retirement and building a solid financial foundation can be very overwhelming. That’s why it’s always encouraged to start as early as possible.

When you start early, you have more time to accumulate funds and more room to recover from any financial mistakes.

If you have concerns or questions about how you should be saving for retirement and what you need to avoid, consult a professional.

The secret to a comfortable retirement is proper savings to live out your golden years without worries.

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Article written by:

Danielle K Roberts, co-founder of Boomer Benefits where she and her team help baby boomers navigate their Medicare insurance options. She is a member of the Forbes Finance Council and writes frequently about Medicare, retirement and personal finance.