If you're like most people getting ready to retire, you're probably counting on Social Security benefits to cover a big portion of your living expenses. Unfortunately, many future retirees significantly underestimate how much of their Social Security check is likely to be eaten up by one big expense: healthcare.
In fact, future retirees responding to a recent survey conducted by Nationwide significantly underestimated the percentage of their Social Security benefits likely to go toward their care as they age.
The good news is, while costly health issues are a fact of life for many seniors, there are steps you can take to try to keep costs affordable and make sure you still have enough Social Security left to live on -- even after paying for medical help.
Pre-retirees don't realize healthcare costs could eat up the majority of Social Security benefits
Pre-retirees responding to the Nationwide survey expected about 15% of their Social Security check to be used on health expenditures during retirement. Further, as many as four in 10 older adults don't believe any of their Social Security benefits will be needed to pay for medical care.
However, an analysis of healthcare costs of typical seniors shows that a retiree who claimed Social Security at 62 is expected to spend, on average, 64% of Social Security income on health expenditures.
Since most retirees also overestimate how much of their pre-retirement income Social Security benefits will replace, underestimating medical costs could have catastrophic consequences for financial security.
Pre-retirees need a plan for healthcare
This study is not the first to carry dire warnings for seniors about how much they'll need to spend on care.
The Employee Benefit Research Institute found a senior couple needs to budget around $370,000 for healthcare to stand a good chance of being able to afford to cope with illness if they require prescription drugs.
Other studies have also shown healthcare is one of two major financial shocks seniors cope with (the death of a spouse is the other), and have demonstrated that those who live until 95 will need as much as $100,000 extra to cover those costs toward the end of their life.
Yet, despite repeated warnings, far too many pre-retirees still underestimate likely healthcare expenditures, and don't have a comprehensive plan to cover them. Don't be one of those seniors -- put plans in place before you leave the workforce.
How you can keep healthcare costs down as a senior
The steps you can take to plan for your healthcare expenses as a senior will vary depending upon your current health situation and age.
One of the best options is to invest as much as possible throughout your working life in a health savings account and leave that money invested until you retire.
If you have a qualifying high-deductible health plan, you can invest up to $3,450 as an individual and $6,900 for a family plan as of 2018. Money can be invested with pre-tax funds and withdrawn without paying taxes on gains as long as the money is used to pay for qualifying healthcare expenditures.
Starting to invest in a HSA early makes it easier to build substantial savings to cover care costs during retirement. If you're 55 or older, you can invest an additional $1,000 annually in catch-up contributions, so there's still time to save.
Seniors can also talk with their doctors about finding ways to reduce out-of-pocket costs, and they can look into Medicare Advantage and Medigap policies to find coverage that goes beyond traditional Medicare. They can also determine if their income is low enough that they can qualify for Medicaid to subsidize Medicare premiums and co-insurance costs.
Finally, staying healthy by eating right, getting regular exercise, and managing chronic conditions can also reduce your healthcare spending as a senior.
Healthcare is expensive as you age
While some seniors get lucky and stay relatively healthy throughout retirement, many others incur the eye-popping costs that studies repeatedly warn about. There's no way to tell if you'll be one of the lucky ones, so it's always best to have a plan for affording healthcare costs before you retire.
By building up your savings, researching insurance options, and otherwise making a comprehensive plan to cover care, you can hope to keep healthcare expenditures from taking up the bulk of your Social Security check.