When it comes to money, there's a lot you may have on your mind. Are you saving enough for retirement? How are you going to pay for your children's college tuition? Will you be able to afford that family summer vacation this year?
Amid all those concerns, there's one cost that worries people the most: healthcare expenses.
A whopping 69% of middle-income Americans are concerned that they won't be able to afford to pay for a major medical expense, according to a recent report from financial institution Primerica. That's more than the 43% who are concerned they're not saving enough for retirement, according to the survey, and the 24% who are afraid of losing a job.
It's a legitimate concern, too -- especially for retirees. The average 65-year-old couple retiring now can expect to spend roughly $285,000 on healthcare costs alone during retirement, according to the latest research from Fidelity Investments. Considering the median amount baby boomers (the generation closest to retirement) have saved is just $152,000, according to the Transamerica Center for Retirement Studies, that means most soon-to-be retirees won't even be able to afford healthcare costs in retirement -- let alone be able to cover all their other financial necessities.
Medicare can help with some healthcare-related expenses in retirement, but it doesn't cover everything. If you want to prepare yourself the best you can against medical bills, it's important to understand the role Medicare plays in retirement, as well as how to boost your savings on your own.
What to expect from Medicare
Medicare is a great resource in retirement, and it can help cover a lot of your healthcare needs. But you're still responsible for premiums, deductibles, and coinsurance; original Medicare generally doesn't cover things like routine dental care, routine eye exams, and long-term care -- which can cost hundreds or even thousands of dollars out-of-pocket.
One potential solution is to enroll in a Medicare Advantage plan. These plans are similar to the type of health insurance you likely receive through your employer, in that they're offered by third-party insurance companies. Many plans include coverage for vision and dental, as well as prescription drug coverage. Premiums vary widely based on your location and the plans offered in your area, but an Advantage plan is often more expensive month-to-month than original Medicare.
Long-term care is one of the most expensive healthcare costs you may face (it costs nearly $7,000 per month, on average, for a semi-private room in a nursing home), and it's typically not covered by Medicare. That means if you want to avoid being blindsided by massive medical bills, it's a good idea to prepare as much as you can before you retire.
Taking healthcare costs into your own hands
While it's not a bad thing to somewhat depend on Medicare during retirement, you shouldn't expect it to cover all your healthcare needs. If you budget healthcare costs into your retirement savings, though, it can help cushion the blow when you do incur expensive medical bills.
One way to do that is to open a health savings account (HSA). Essentially, it's a retirement fund just for healthcare expenses. An HSA allows you to set aside pre-tax dollars, let that money grow, and then withdraw it tax-free as long as it goes toward eligible medical expenses.
There are limits to how much you can contribute to an HSA, though, and not everyone is eligible to open one. To open an HSA, you need to be enrolled in a high-deductible healthcare plan -- meaning you have a deductible of at least $1,350 for individuals or $2,700 for families. The contribution limits, then, are $3,500 per year for individuals or $7,000 per year for families. And if you're age 55 or older, you can contribute an additional $1,000 per year.
With an HSA, you can set aside money specifically for healthcare costs so that you don't need to dip into your primary retirement fund to cover those expenses. Plus, because HSA contributions are tax-free upon withdrawal (assuming they're going toward healthcare costs), you'll see a tax break compared to if you used funds from a 401(k) or traditional IRA to cover medical bills.
Another way to potentially save on healthcare expenses in retirement is to opt for long-term care insurance. The key to buying long-term care insurance is to buy it earlier rather than later so you can get the best rates. The average 55-year-old couple pays around $2,500 per year for long-term care insurance, according to the American Association for Long-Term Care Insurance, while the average 60-year-old couple can expect to pay around $3,400 per year. And those who are already past their 60s may have trouble finding insurance at all.
While spending thousands of dollars per year on insurance may seem too expensive, keep in mind that roughly 70% of Americans will need long-term care at some point in their lives. And at nearly $7,000 per month out of pocket for nursing home care it isn't cheap.
Healthcare costs may not be pleasant to think about, but ignoring them won't make them go away. Instead, take a proactive approach and start preparing for them long before you retire. It will not only be good for your peace of mind, but it will be good for your wallet, too.