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This Expense Is Costing 40% of Retirees More Than They Expected

By Kailey Hagen – May 21, 2020 at 7:31AM

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There's no avoiding it, and being too optimistic could backfire in a big way.

We all hope we're going to remain healthy into our old age, but the truth is, you never can be sure. Even if you eat right and exercise regularly, you never know when an injury will send you to the emergency room or a broken tooth will force you to visit the dentist for a crown. The worst-case scenario is ending up with a costly illness that requires long-term care and frequent doctor visits, but even if that doesn't happen to you, you can pretty much bank on some healthcare costs in retirement -- and you may need to plan for more than you think.

Forty percent of retirees surveyed in the Employee Benefit Research Institute's 2020 Retirement Confidence Survey said they're spending more on healthcare and dental expenses than they'd anticipated they would when they first retired, with 13% of those saying they're spending much more than they'd expected. 

Worried mature woman looking at laptop

Image source: Getty Images.

You can never know in advance exactly how much you need, of course, but when planning for retirement costs, it's better to be too pessimistic about your health than too optimistic. Here's what you should know about budgeting for these expenses.

Retirement healthcare will likely cost hundreds of thousands of dollars

Several studies have attempted to quantify the average amount retirees spend on healthcare. One of the most optimistic estimates comes from Fidelity, which figured the average 65-year-old woman retiring in 2019 would need $150,000, while the average 65-year-old man would need $135,000, adding up to a combined $285,000 for a 65-year-old couple. Another study by HealthView Services places the average cost of retirement healthcare for a 65-year-old couple retiring in 2019 at $606,337.

Everyone's situation is different, but these two figures clearly illustrate that healthcare is going to cost most people a sizable chunk of their retirement savings. It's true you'll have Medicare to cover some of your costs, but Medicare still comes with premiums, deductibles, and copays, and it doesn't cover everything. If you need long-term care or hearing aids, you'll pay the full cost of these items on your own unless you have a supplemental health insurance policy.

It doesn't take long for things like that to start adding up. If you don't plan for high healthcare costs when saving for retirement, you could burn through your nest egg faster than you expected and end up struggling to pay your regular bills in your final years. Careful planning now is the only way to prevent this from happening.

Save as much as you can for retirement healthcare right now

The best way to ensure your medical bills don't drain your retirement savings too quickly is to build the cost of healthcare into your retirement plan. You can use the above figures as a baseline and go with the higher estimate if you want to be safe. Or you can look at your current healthcare expenses and try to estimate what you might spend in retirement. Remember, healthcare costs typically rise as you age, so you must account for that as well as healthcare inflation, which will be about 4.9% annually, according to HealthView Services.

You can keep this money in your retirement account, but consider a health savings account (HSA) if you have a high-deductible health insurance plan. That's defined as one with a deductible of $1,400 or more for an individual or $2,800 or more for a family. Money you put in an HSA reduces your taxable income for the year, just like money you put in a tax-deferred retirement account, but you can also withdraw the money at any time, and if you use it for medical or dental expenses, you won't pay taxes on it at all. Some HSAs enable you to invest your funds to help them grow more quickly.

Any money you can stash away for retirement healthcare helps, whatever your age, but the contributions you make when you're young are the most beneficial because that money has decades to remain in your retirement account or HSA, appreciating in value before you need to begin using it.

Evaluate your insurance coverage carefully

Retirees will be able to count on Medicare to help them with some of their bills once they turn 65, but if you retire before that, you'll have to purchase an insurance policy on your own, rely upon your spouse's insurance, or see if you can remain on your former employer's policy for a while longer. You definitely don't want to forego coverage altogether, because a single medical emergency could wipe out a lot of your savings all at once.

Consider purchasing a supplemental insurance policy to help you with the things Original Medicare doesn't cover. A Medicare Part D plan can help you pay for the cost of your prescription drugs, while a Medicare Advantage or a Medicare Supplement plan can help fill in some of the other gaps in your health coverage. You should also consider some type of dental insurance or a dental discount plan to help you save on the cost of dental work in retirement.

And of course, you should take care of your health at every stage of life. This probably won't stop you from ever visiting the doctor in retirement, but it can still go a long way toward reducing your risk of illness and chronic health problems. 

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