Preparing for Health Care Outlays in Retirement

Retirees are spending an average of $4,000 a year on out-of-pocket health care costs, according to the Employee Benefit Research Institute. In its annual report on senior spending, EBRI noted that average annual out-of-pocket health care costs have remained steady for the past five years and that non-recurring costs create the most expenses for people. These costs increase significantly at the end of a person’s life and particularly if someone has a significant health emergency like a heart attack or is diagnosed with a chronic disease.

With this in mind, it’s crucial for seniors to have their finances and Medicare insurance, and to supplement that with long-term care and/or critical illness insurance. Experts said that the average annual out-of-pocket health care costs were about $4,000 for people between the ages of 65 and 74. This accounted for more than 10% of the total expenses. The same amounts were estimated for people 75 to 84 years of age, the EBRI study found.

For households with people who were 85 or older, that amount rose to more than $6,000 per year. Their average came to a total of nearly 15% of household expenses. EBRI’s analysis used data from other studies, which classified dentist visits, doctor visits, the usage of regular health services and prescription drug use as recurring expenses. Non-recurring costs included overnight stays in skilled care facilities, overnight hospital stays, home health care, special facility usage and outpatient surgery.

Additionally, the report from EBRI showed that annual recurring health care costs for people eligible for Medicare were close to $2,000. With an average inflation rate of 2% and a return of 3%, a person who lives to be 90 would need a little more than $40,000 at the age of 65 to pay for recurring costs. This figure does not include costs for over-the-counter medications or insurance premiums. The costs of non-recurring health care rise as people age, and nursing home stays are the most expensive items.

The national annual median cost of care now ranges from nearly $106,000 for a private room in a nursing home to $19,240 for adult day health care services (based on five days per week), according to the Genworth “Financial Cost of Care Survey 2020.”

 

Dealing with health expenses

There are a number of ways to save for and be prepared for higher health care outlays as we age:

Start an HSA

Many employers will offer high-deductible health plans that are tied to a health savings account. These accounts can be funded up to the max that the IRS sets each year for individuals and families. HSAs are funded with pre-tax dollars and when you withdraw the funds for future health expenses, they are not taxed. Additionally, you can invest those funds just like you would money in a 401(k).

Have health insurance

Medicare eligibility starts at age 65. Your initial window to enroll begins three months before the month of your 65th birthday and ends three months after it. Seniors are generally advised to sign up on time to avoid penalties that could prove quite costly over the course of retirement. If you’re still working at 65, and you have coverage under a group health plan through an employer with 20 or more employees, then you don’t have to enroll in Medicare right away.

But if your employer has fewer than 20 employees, you need to take Medicare Parts A and B, because that will be your primary insurance. If you don’t enroll, your employer plan may pay less or nothing at all for your care when it finds out.

Get additional coverage

Traditional Medicare, the public health insurance program for people over 65, does not cover long-term care beyond some skilled care right after hospitalization for an injury or illness. There are few other options for you to get additional coverage in case you need long-term care (think assisted living or nursing home).

Two types of insurance you may want to consider are:

• Long-term care insurance

  This pays out if you become unable to care for yourself because of a chronic illness; disability; cognitive impairment, such as dementia; or other age-related conditions preventing you from managing a number of the activities of daily living without assistance.

• Critical illness coverage

  A critical illness plan is a policy that pays the insured a lump sum following the diagnosis of an illness covered under the plan. Critical illness plans often cover diseases like cancer, organ transplant, heart attack, stroke, renal failure and paralysis.