Planning and paying for healthcare in retirement
Those saving and planning for retirement face a lot of important questions. How much will it cost to live comfortably in retirement? How much money is needed in order to pursue travel and other hobbies we enjoy? Importantly, how much is healthcare in retirement?
All too often, those approaching retirement fail to consider healthcare costs in their retirement planning and spending estimates. Several industry studies have pegged the costs of healthcare in retirement as a major expense that those approaching retirement often underestimate. Generally, the cost of healthcare for retirees is rising faster than the general level of inflation.
When it comes to paying for healthcare in retirement, planning ahead can help prepare you to mitigate some of the cost.
If you’re approaching retirement, here are some key healthcare issues to consider.
When you reach age 65, you become eligible for Medicare. In some cases, you can be eligible prior to age 65 with certain medical conditions including ALS or end stage renal failure. There are also rules for non-U.S. citizens that will apply.
Medicare has two basic parts:
- Part A covers hospital care plus other related services like skilled nursing care. If you or your spouse paid into Medicare for at least 10 years while working the cost is free.
- Part B covers medical expenses such as doctor visits and various preventative services. There is a monthly Part B premium that is dependent on your income for prior years.
Parts A and B are what’s known as "original Medicare."
Part C is known as Medicare Advantage. Medicare Advantage plans are issued by private insurers and typically include the coverage provided in parts A and B, as well as coverage for other non-covered services. The menu will vary by plan. Some plans will include prescription drug coverage that is included in Medicare Part D.
Keep in mind that Medicare will likely not cover all your medical and health needs in retirement. Items not covered under Parts A and B include:
- Dental care
- Long-term care
- Eye exams
- Cosmetic surgery
- Hearing aids
- Routine foot care
If you are working at the time you become eligible for Medicare, you may be able to defer enrolling until such time as you are not covered by an employer’s health insurance plan. Speak to an advisor to discuss your specific needs and situation to ensure you are covered.
Using a health savings account (HSA)
For those enrolled in a high-deductible health plan, an HSA can be a smart way to allocate funds for qualified healthcare expenses. With an HSA, contributions are made pretax and withdrawals for qualified medical expenses are tax-free.
HSA contribution limits for 2022 are:
- $3,650 for those who are single
- $7,300 for a family
- Those who are 55 or over can contribute an additional $1,000, which is the same as 2021
The beauty of an HSA is that money left in the account at the end of the year can be carried over to subsequent years. It can be used for qualified medical expenses, or it can be saved for retirement where it can be used to cover deductibles, Medicare premiums or other qualified medical expenses.
If the money in an HSA is not used for medical expenses in retirement, it will be treated like an IRA once you reach age 65. Withdrawals from an HSA after age 65 will be subject to taxes, but there will be no penalties.
Funds in an HSA can be invested. For those who can afford to do so, using their HSA as an additional retirement account can add to their retirement nest egg.
How lifetime income products can help
Lifetime income products such as annuities can help fund retirement expenses including the ever-increasing costs of healthcare in retirement. Annuities offer a number of retirement advantages including:
- Lifetime income that can’t be outlived
- Serving as a replacement for pension income (particularly as employee pensions become less and less common)
- Helping ensure that basic monthly expenses are covered, including Medicare premiums and related healthcare costs
- The insurance company that issues your annuity guarantees the income stream and backs the guarantee with its claims-paying ability
Be sure to factor in the ever-increasing costs of healthcare into your retirement planning. Failure to do so could result in a less financially secure retirement than you had anticipated.
Why choose AIG Retirement Services?
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