Introduction:

A single person age 65 in 2023 may need about $157,500 saved after taxes to cover health care expenses in retirement, according to Fidelity. In 2023, their estimate for an average retired couple aged 65 is around $315,000.

The actual amount you’ll need will depend on many variables, including where you live during retirement, your health, and how long you may live. Remember, Fidelity’s numbers are just an average. Some folks will spend more, and some will spend less.

The good news is that costs are expected to stay the same compared to 2022. The bad news: it’s almost double the 2002 estimate.

Fidelity bases its example on those who take part in traditional Medicare. If you have yet to retire, do not assume that Medicare is a panacea for all health care costs. Many younger folks believe that Medicare covers all expenses. It doesn’t. While coverage is broad, it does not take care of everything.

Let’s take a brief look at Medicare.

Medicare Part A covers treatment in a hospital. It’s free for most folks.

The premium for Medicare Part B, which covers doctor visits and lab tests, is currently $165 a month (or more, depending on your income). There’s usually a 20% cost share when you receive treatment.

Many who enroll in traditional Medicare purchase what’s called a Medigap policy. A Medigap policy is health insurance sold by private insurance companies that help plug “gaps” in traditional Medicare. Medigap policies help pay for some health care costs that original Medicare doesn’t cover.

You may go to any doctor that accepts traditional Medicare insurance.

The premium varies for Part D, which covers prescription drugs. Beginning in 2025, out-of-pocket costs for prescription drugs will be capped at $2,000 a year.

Medicare Part C is growing increasingly popular. Also known as a Medicare Advantage Plan, Medicare Part C wraps Parts A and B into a single plan.

Many offer vision, hearing, dental, and health and wellness programs. Most include Medicare Part D.

Private health insurance companies offer Medicare Advantage plans. They must follow rules set by Medicare. But much like an HMO or PPO, you’ll be funneled into in-network doctors or your out-of-pocket costs will be much higher.

However, since 2011, federal regulations for Medicare Advantage have mandated out-of-pocket limits for Parts A and B. In contrast, traditional Medicare has no out-of-pocket limit for covered services—hence the need for a Medigap policy.

In 2023, the out-of-pocket limit for Medicare Advantage plans may not exceed $8,300 for in-network services and $12,450 for in-network and out-of-network services combined.

Planning smart for health care in retirement

With this brief review in mind, let’s look at several ways you can position yourself favorably as you approach retirement.

1. Obtain the correct Medicare plan that best suits your needs

The information we provided above is a broad outline. The insurance you obtain during retirement will depend on costs, your health and your individual circumstances.

If you decide that Medicare Advantage is the right choice for you, you will want a plan that includes your doctors and medications to avoid higher out-of-network costs.

If you have additional questions, we would be happy to point you in the right direction.

2. Take advantage of a Health Savings Account

You must have a high-deductible plan, but you may contribute up to $3,850 pretax to a Health Savings Account (HSA) as a single person and up to $7,750 if you have family coverage.

Much like an IRA, capital gains and earnings in an HSA are sheltered from taxes. Moreover, you may withdraw from an HSA and pay no taxes if the funds are used for qualified medical expenses.

Other HSA advantages:

• You may use your HSA to pay certain Medicare expenses, including premiums for Part B and Part D prescription drug coverage.

• Your HSA can be used to cover part of the cost of a tax-qualified long-term care insurance policy.

• Your HSA is a retirement savings account, too. In other words, an HSA becomes a viable tool that can be used to save for retirement as well as a savings account for health care expenses.

For example, let’s say you are 68 years old and withdraw $1,000 from your traditional IRA to pay for qualified medical expenses. You’ll pay federal and state income taxes on that withdrawal. If you pull $1,000 from an HSA for the same expenses, you won’t pay any taxes.

Consider maxing out your IRA and HSA if possible. If you can’t max out both, consider placing some of your retirement savings into an HSA.

3. Plan for long-term care

Long-term care is a difficult topic many would rather avoid. A person turning 65 has about a 70% chance of needing long-term care at some point, according to the Department of Health and Human Services.

Medicare covers skilled home health care if it’s required.

However, coverage for skilled nursing home care is limited. Medicare pays for the first 20 days in a nursing home. You’ll pay a $200/day co-payment for days 21 to 100. After day 100, you’ll be responsible for 100% of the cost.

You may consider a long-term care policy, which can be quite expensive.

To address this potential obstacle, you may look at hybrid insurance, which is a combination of permanent life with a long-term care rider. Another option is self-insurance, where you set aside funds that may be used for long-term care.

Assessing your situation is the most important factor in determining the correct approach to health care. It’s a complex issue. It sometimes feels as if you are untying a knot when you are planning for health care coverage.

But there are solutions. This month’s post serves as a guide that can help you untangle that knot. If you have additional questions, I'm happy to assist.