What To Do in Your 40 and 50s To Plan for Healthcare Costs in Retirement

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Retirement might still feel a long way off in your 40s and 50s, but that day is going to arrive faster than you think. And the time to prepare financially and physically is now, not later.

While retirement advice often focuses on finances, adults also need to make plans for healthcare costs, since older age is when people are more likely to need these services. Here we get expert takes on the best strategies for preparing for retirement healthcare costs early.

Build Up Non-Retirement Savings

Though this tip is not specifically healthcare related, it’s a good idea to build up non-retirement savings as well as contributing to retirement accounts, says Corey Noyes, owner and financial advisor with Balanced Capital.

“If you retire at say 62, and have some years you need to pay for insurance before Medicare kicks in, your plan will be to live off of that savings you built up. If you are living off a non-retirement account, your earned income for the year will be very close to zero. That will then trigger substantial subsidies for health insurance through the Obamacare exchange.”

Take Care of Your Health Now

Taking care of your health now is an investment in your future that could save you on healthcare costs. David Edmisten, CFP, and founder of Next Phase Financial Planning, LLC, said, “Middle aged people should consider the current state of their health and their family medical history. Are there chronic health issues that need specific care? Are there common health issues in the family that could materialize later in life?  Middle aged people should also consider how they prefer to manage their healthcare and lifestyle choices. Are there changes in diet, exercise or personal wellness that could prevent or reduce healthcare costs in the future? By maximizing healthy lifestyle changes now, one can potentially decrease their annual healthcare costs in retirement.”

Are You Retirement Ready?

Healthcare costs make up 9% to 14% of the average older household’s spending, a significant expense in retirement, Edmisten said. “Reviewing their current health status, making healthy lifestyle changes, budgeting for expected health costs, considering health coverage options before Medicare and evaluating savings options like a health savings account (HAS) can all help a middle-aged person plan effectively for health costs in retirement,” he said.

Find a Life Insurance Policy That Covers Chronic Illness

David Lewis, founder and owner of Monegenix, urges middle aged people to ensure that their life insurance covers chronic illness benefits. “[This] can help an individual save their precious assets if they encounter a serious health condition nearing/during retirement.”

Chronic illness can often prevent a person from working or even caring for themselves. In this scenario, the insurance company usually allows the individual to use a portion of their death benefit to meet the healthcare expenses, he explained. “Plus, they won’t be overspending on expensive long-term care premiums, which can go into the drain if any health-related issue doesn’t happen to the individual.”

Plan for Higher Healthcare Costs

As much as you think healthcare costs in retirement will be, they’ll probably be higher than what they currently are, and you should plan accordingly, said Andrew Rosen, CFP, president of Diversified LLC.

“It can be useful to work with a financial planner to map out various scenarios with cost estimations that can give you savings goals,” Rosen said. “There are a wide variety of ways to save for your healthcare costs, depending on your specific situation — if you have a health savings account, that may be a good option for saving, but there are also long-term care insurance plans, annuities and other options available. The amount you’ll need depends on your life expectancy, health and other factors.”

Are You Retirement Ready?

He cited a study from HealthView Services that estimated a 55-year-old couple planning to retire at 65 would need $1,035,980 in healthcare savings.

Understand Medicare

While many older adults expect Medicare to cover most of their healthcare needs, Medicare is not cost-free, and is not all-inclusive, said Daniel Prebish, director of executive services at Wells Fargo Wealth & Investment Management.

“There are costs for Medicare Part B (medical insurance) and Part D (prescription drug) coverage. Your monthly premiums will be higher if you have a higher level of income from all sources. As you create your financial plan, be sure to factor in a premium level that is realistic for your expected income during retirement,” he said.

Most people will want to obtain Medicare supplement insurance, which provides coverage in areas where Medicare requires coinsurance or co-pays, or that Medicare does not cover. Medicare also does not cover long-term skilled nursing care, memory care or assisted living facility costs, Prebish explained. For that, you’d need long-term care insurance.

Look Into Long-Term Care Insurance

Kevin Lao, CFP, founder of Imagine Financial Security, LLC, recommends long-term care insurance for those unexpected health crises no one likes to think about.

“Most people wait until they are 60s or 70s to think about this, but by then the premiums can be quite expensive,” Lao said. “In addition, an unfavorable diagnosis could preclude you from being able to purchase long-term care insurance. A recent study found that 70% of long-term care is provided by unpaid caregivers (family members). This further validates insurance, because the folks that claim to ‘self insure’ are simply not doing so.” 

Consider a Health Savings Account

One of the best ways to save for healthcare expenses in retirement is through a Health Savings Account (HSA), according to Katie Kavehrad, financial planner with Paradigm Wealth Partners.

Are You Retirement Ready?

“HSAs are triple-tax advantaged accounts that can be treated as a long-term investment and work for those enrolled in a high deductible health plan (HDHP). It is a personal savings account where contributions are tax deductible, it grows tax free, and withdrawals are tax free as long as funds are used for qualified medical expenses like deductibles, copayments and even long-term care premiums,” Kavehrad explained.

In 2022, the contribution limits are $3,650 per individual or $7,300 for a family. If you are 55 or older, there is an additional catch-up contribution for $1000.

“If they are planning to retire before they are eligible for Medicare at age 65, then they need to consider their options for health insurance in the gap years between retirement and Medicare. This can be a significant expense for those who retire early,” she added.

In short, expect higher costs, and potentially poorer health, than you think you’ll have. This will help you be better prepared for all outcomes.

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