You've probably factored housing costs, utilities, insurance, groceries, taxes, and travel into your retirement plan. But if you've forgotten about healthcare, your retirement savings may fall short of your needs -- $285,000 short, to be precise. That's Fidelity's latest estimate for what a 65-year-old couple retiring in 2019 will need to cover their healthcare costs in retirement. It's an increase of $5,000 compared to a couple retiring in 2018. And that number is likely to continue rising.
If you haven't planned for retirement healthcare costs, you may end up draining your retirement savings faster than planned, leaving you without enough money to pay your bills in your final years. But this doesn't have to happen. Below, I explain why retirement healthcare costs are rising and how you can plan for them.
The rising cost of healthcare in retirement
There are several reasons retirement healthcare costs are going up. First, people are living longer today than they were a generation or two ago, so they simply need more money to cover these extra years. This is especially true for women who typically live longer than men. The Fidelity study estimates that a 65-year-old woman retiring today would need $150,000 to cover retirement healthcare costs while a 65-year-old man would only need $135,000. These estimates include Medicare's premiums, deductibles, and copays, but they do not include things that Medicare doesn't cover, like dental work, long-term care, and vision coverage.
If you retire before 65, you're placing an even larger burden on yourself because you'll have to purchase your own health insurance to cover you in the interim until you're eligible for Medicare, and these policies are usually more expensive than a health insurance policy you'd get through an employer. But going without health insurance during this time is risky because a single accident could cost you thousands of dollars.
Another factor that plays into the rising retirement healthcare costs is inflation. The annual medical inflation rate has decreased over the last two years, according to the survey, but it still outstrips the regular inflation rate. Over the past 20 years, medical costs have increased 70% faster than the general inflation rate, according to the Federal Reserve Bank of St. Louis, and there's no sign of that changing.
How to plan for retirement healthcare costs
You can use the $285,000 figure as a starting point when determining how much to save for healthcare, but if you're several years away from retirement, figure higher to account for inflation. The Centers for Medicare & Medicaid Services' Office of the Actuary estimates that healthcare costs will increase by 5.5% annually from 2017 to 2026. So a 65-year-old couple retiring next year could need as much as $300,000 to cover their healthcare expenses. It may not climb this sharply, but you're better safe than sorry. You should also plan for higher healthcare costs if you anticipate having above-average healthcare costs, due to a personal or family history of health problems.
You can save for retirement healthcare expenses in your 401(k) or IRA, but if you have a high-deductible health insurance plan -- one with a deductible of $1,300 or more for an individual or $2,700 or more for a family -- a health savings account (HSA) may be your best option. HSA contributions reduce your taxable income this year, and you won't pay any taxes on them at all if you use them for qualified medical expenses. If you use the money for a nonmedical expense, you will owe taxes on it, plus a 10% penalty if you're under 65. Individuals may contribute up to $3,500 to an HSA in 2019 and families may contribute up to $7,000. You can add an extra $1,000 to these limits if you're 55 or older but not yet enrolled in Medicare.
If your existing retirement plan doesn't include healthcare or doesn't allot enough money for healthcare, redo it now. Don't forget to add in the cost of any supplemental health insurance policies, like Medigap policies, you plan to purchase to help you pay for what Medicare doesn't cover. Once you've gotten your updated retirement cost estimate, increase your savings accordingly. If you don't have room in your budget to save as much as you'd like today, just save as much as you can and try to increase your contributions by 1% of your salary each year.
Healthcare is one of the most unpredictable expenses in retirement, but in almost every case, it amounts to hundreds of thousands of dollars. Planning for it is essential to keeping your retirement on track, so build these costs into your retirement budget today.