Budgeting Healthcare Costs in Retirement

Written By: Nick Ziarek, CFA, CFP®

Planning for retirement comes with many unknowns including when can you retire, will there be enough income to cover expenses, will you outlive your savings, and maybe one of the biggest is how much will healthcare cost in retirement. Let’s review common scenarios to provide a starting place for your budget.

Medicare

For someone on Medicare, they typically face three main healthcare related expenses:

1) The cost of Original Medicare, which includes Part B (medical coverage) and Part D (prescription drug coverage). Once you are on Social Security, these premiums are deducted directly from your monthly checks and thus you may not even realize how much you pay.

2) Out-of-pocket expenses not covered by Medicare Part B or Part D including deductibles, co-pays and uncovered medical expenses.

3) In addition, retirees need to plan for the expense of dental, vision, hearing aids and other needs that are not typically covered by Medicare plans.

According to the Mercer-Vanguard Healthcare Cost Model, the median annual healthcare cost for a 65-year-old woman (including premiums, out of pocket, dental and vison) was $5,300 for 2022. This was for someone on Original Medicare with a supplemental insurance policy.

Retiring Before Age 65

What if you retire before Original Medicare begins? Depending on the situation your options could include:

– Affordable Care Act Plans (commonly referred to as Obamacare)

– Private health insurance

– Coverage through a partner’s employer

– Employer-sponsored retiree health insurance

– Part-time employment for health coverage

– Relocating to a lower cost area

Planning Ahead

Developing a solid retirement plan should include identifying potential costs including premiums for Medicare, prescription drug costs and potential long term care costs.

Knowing how to bridge the gap between employment and qualifying for Medicare will include managing income to maximize healthcare premium tax credits and reviewing savings options such as Health Savings Accounts (HSAs). These help lower income today while providing future tax-free distributions to cover certain expenses.

It is important to have a plan for how to allocate funds to cover healthcare expenses in retirement.  Working with your Shakespeare advisor, we help you identify those costs and risks to ensure you’re on the best path for a happy and healthy retirement. Give us a call as we are here to answer your questions for your specific scenario and provide peace of mind.