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This One Thing Could Cost You Hundreds of Thousands of Dollars During Retirement

By Katie Brockman – Feb 3, 2019 at 5:00PM

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Healthcare costs threaten to throw your entire retirement way off track.

When you think about expenses you'll face in retirement, what do you picture? Housing? Hobbies? Splurging on that dream vacation you've always wanted?

One expense you'd better add to your list is healthcare. Though nobody wants to plan for massive healthcare costs during retirement (or at all), failing to include them in your retirement plan could spell financial disaster down the road.

Doctor talking to patient

Image source: Getty Images.

But if I have insurance, most of my healthcare costs will be covered, right? Not necessarily.

Even if you're eligible for Medicare, you'll still face out-of-pocket expenses -- and those add up quickly. In fact, the average retiree age 75 and up can expect to spend at least $100,000 on out-of-pocket medical expenses during retirement, according to a recent study from the Center for Retirement Research at Boston College, and the top 5% of spenders pay three times that much.

Most of these costs come from healthcare expenses that Medicare doesn't cover. You are responsible for covering the costs of premiums, deductibles, and copays, as well as routine care and long-term care, should you require it. Long-term care can cost thousands -- in fact, the average semi-private room in a nursing home costs nearly $7,500 per month, according to insurer Genworth's 2018 Cost of Care Survey.

So what can you do to combat these costs? The first step is figuring out exactly what expenses you'll be on the hook for during retirement.

What Medicare does (and doesn't) cover

If you're confused about what exactly is covered, you're not alone. Roughly two-thirds (67%) of older Americans say they plan to use Medicare to cover their healthcare expenses during retirement, according to a survey from the Nationwide Retirement Institute, yet 72% say they don't fully understand how Medicare works. 

Understanding how much you'll pay for Medicare (because it's not 100% free) and what types of costs are covered will benefit your retirement plan by adding an element of precision to your nest egg goal. Healthcare expenses can quickly drain your retirement fund if you're not careful and informed.

The first distinction is the difference between original Medicare and a Medicare Advantage plan. Original Medicare is Medicare Parts A and B -- Part A covers most hospitalization costs, while Part B covers doctor visits, lab tests, and some preventive care.

You can also sign up for Part D coverage, which is specifically for prescription drugs. If you choose to add Part D coverage, that will be an additional expense, and costs vary depending on your specific plan.

Original Medicare does not cover routine care, such as dental and vision. While it does cover emergencies (for example, if you need emergency dental or eye surgery), it won't cover most other types of care (like teeth cleanings, fillings, or eye exams for prescription glasses or contacts).

Typically, you don't pay a premium for Medicare Part A, but you do have a deductible of $1,364.

You do have to pay a premium for Part B coverage; for 2019, if you were earning less than $85,000 per year (or $170,000 per year for those who are married filing jointly), your Part B premium is $135.50 per month. Your Part B deductible, then, is $185 per year, but after you meet that amount, you'll still need to pay 20% of most other expenses.

Medicare Advantage plans are provided through third-party insurance companies, and they're similar to the insurance you may have through an employer. Advantage plans provide the same coverage as Medicare Parts A and B, and some also provide prescription drug and routine-care coverage as well. Their costs vary widely depending on a variety of factors -- some plans do not charge premiums (but have higher copays or coinsurance), while others charge higher premiums but offer better coverage.

Build healthcare costs into your retirement plan

To avoid the sticker shock of healthcare costs in retirement, plan for them before you retire. As you're creating your retirement budget, add wiggle room to factor in costs of premiums, deductibles, and other out-of-pocket healthcare expenses. While you can't predict with perfect accuracy what you'll spend on healthcare each year in retirement, it's better to be prepared with a cash cushion for this purpose rather than being forced to cut back in your budget when your doctor bill comes due and you can't afford to pay it.

A great option for saving money for medical expenses is a health savings account (HSA), which is essentially a tax-favored retirement fund just for healthcare costs. An HSA allows you to make tax-deductible contributions, let that money grow for many decades, and then withdraw it tax-free, as long as it pays for qualified medical expenses.

HSAs are designed for those saddled with high-deductible healthcare plans (meaning your deductible is at least $1,350 if you're single or $2,700 if you have family coverage). This means if you don't have a high-deductible plan, you may not be eligible for an HSA. If you are eligible, there are contribution limits you'll have to adhere to. For 2019, you can contribute up to $3,500 per year (for individuals), or $7,000 (for families). And if you're age 55 or over, you can contribute an additional $1,000 per year.

Even if you're in supreme physical shape right now at the prime of your life, you're guaranteed to encounter healthcare expenses during retirement -- and you can't expect Medicare to cover everything. Going into retirement with a clear expectation of what's covered and what's not can help you in many ways. By knowing roughly how much you'll need to pay on your own, it will relieve what could potentially be a huge healthcare headache during the time of your life you should be enjoying your time.

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