Lots of people assume that their living costs will drop substantially in retirement. But many seniors actually find that their living expenses largely stay the same or even go up. While there are different reasons for this trend, the ever-climbing cost of healthcare is a big contributor.
The average healthy 65-year-old couple retiring this year is expected to spend a whopping $387,644 on healthcare in retirement, according to new estimates by HealthView Services, a cost-projection software provider. That might seem like a ridiculous amount of money, but when we think about the medical expenses most seniors face, coupled with the fact that seniors are living longer, it begins to make sense.
Here are just a few reasons why retirees are forced to spend so much money on healthcare.
1. Medicare isn't free
Some people apply for Medicare thinking it's free, only to be shocked to learn that they're liable for premium costs. To be clear, Medicare Part A, which covers hospital visits, is free for most enrollees, but Parts B and D, which cover doctor visits and prescriptions, respectively, charge a premium. The standard Medicare Part B premium this year is $135.50, and that's paid on a monthly basis. Part D premiums, meanwhile, vary based on the plan that's chosen.
In addition to premium costs for Medicare, there are also deductibles, coinsurance, and copays to worry about. As such, seniors who sign up for Medicare often wind up with more bills on their hands than they initially bargained for.
2. Medicare doesn't cover everything
Though Medicare covers a wide range of healthcare services, there are several key areas it won't pay for. For example, Medicare doesn't cover dental services, hearing aids, or vision services (though it will pay to screen for and treat certain eye diseases, like glaucoma).
3. Supplemental insurance costs money, too
Many seniors who sign up for Medicare wind up buying supplemental insurance, otherwise known as Medigap, to pay for some of their healthcare costs not covered by Medicare. The cost of Medigap varies depending on the scope of coverage at hand, but the higher the premiums, the better the benefits, and vice versa. Furthermore, while Medigap will help pay for things like copayments and deductibles, it won't pick up the tab for routine dental, vision, and hearing services.
Saving for healthcare in retirement
Because retirees pay a bundle for healthcare costs, it's crucial to save for that expense well in advance, and a good way to do so is via a health savings account, or HSA. An HSA is a hybrid savings and investment account.
Those who have a high-deductible health insurance plan (defined as a deductible of $1,350 for single coverage or $2,700 for family coverage) can contribute funds that are then invested for added growth. HSA withdrawals can be taken at any time to cover qualified medical expenses, but the purpose of having an HSA is really to carry funds from year to year to benefit from that investment growth.
HSA participants today can contribute up to $3,500 a year as individuals, or up to $7,000 a year at the family level. Those 55 and over can put in an additional $1,000 as a catch-up, and employers can contribute to HSAs on behalf of their employees. Best of all, HSA contributions are made with tax-free dollars, and that money then gets to grow tax-free and be withdrawn tax-free -- provided it's used for qualifying medical expenses.
Of course, not everyone has a high-deductible health insurance plan, so funding an HSA isn't always on the table. But given that healthcare in retirement is so overwhelmingly expensive, those who do have the option would be wise to consider it.