The Downside of Not Planning for Healthcare Costs Before Retirement

Some of the expenses you face today may go down once you retire. For example, if you own a home, your mortgage might be paid off by the time your career wraps up. So if that's a $1,400 monthly expense you're dealing with now, you won't have to worry about it in retirement.

However, if there's one expense that tends to rise in retirement, it's healthcare. As people age, health issues have a tendency to pop up. And while Medicare might pick up some of your costs, that doesn't mean you won't spend a large chunk of your retirement income on medical bills.

In fact, it's really important to read up on healthcare in retirement and understand how Medicare works. If you don't, you might end up struggling financially as a senior. Worse yet, you might end up in a situation where you can't afford the care you actually need. With that in mind, here are some steps to take ahead of retirement.

1. Get a general sense of what healthcare might cost

The amount of money you might spend on healthcare as a retiree will hinge on factors like the state of your health, and how well you take care of yourself. But it's a good idea to research general healthcare costs to get a sense of what you might be dealing with.

Fidelity says that the average 65-year-old retiring in 2023 could expect to spend $157,500 on healthcare during retirement. Your personal spending may be lower or higher. But this at least gives you a number to work with. If you figure on a 20-year retirement and rely on that $157,500 figure, it means you may be looking at almost $7,900 a year in medical expenses.

2. Familiarize yourself with Medicare

You may not be inclined to read about Medicare when you're in your 30s and 40s and you know it's not available to you. But the more you learn about it, the better you can plan for future healthcare expenses.

First, you should know that Medicare eligibility begins at age 65. So if you're planning to end your career at, say, 62, you'll need to factor in the cost of health insurance for the first three years of your retirement.

Plus, once you're able to enroll in Medicare, it won't be free. Original Medicare consists of three parts:

• Part A, which covers hospital care
• Part B, which covers outpatient care
• Part D, which covers prescription drugs

Part A generally is free for enrollees, but there's a monthly premium for Part B that changes annually. Right now, the standard monthly Part B premium is $174.70. That figure could rise (a lot) over time, and higher-income retirees pay more than that. There's no standard cost for Part D, as it hinges on the plan you choose -- but there is a cost.

On top of that, you'll have copays, deductibles, and coinsurance to cover for services covered by Medicare. Those are definitely expenses to factor into your budget.

3. Put money aside specifically for healthcare costs

Because healthcare might cost you so much in retirement, it's a good idea to save for it specifically. Sure, you could pad your IRA or 401(k), but you might feel better knowing you have dedicated funds available for healthcare during your senior years.

To that end, it pays to fund an HSA, or health savings account, if you're eligible to. HSAs let you save for healthcare in a tax-advantaged manner. You can contribute to an HSA any year you're eligible and carry that money into retirement so you have separate funds for healthcare only.

The requirements to participate in an HSA change yearly. In 2024, you're eligible with a self-only health plan that has a minimum deductible of $1,600 and an out-of-pocket maximum of $8,050. If you have family coverage, you need a minimum deductible of $3,200 and an out-of-pocket maximum of $16,100.

You're not doomed if an HSA is off the table. You could open a regular brokerage account and save and invest funds for healthcare there. You won't get the same tax breaks as with an HSA, like tax-free contributions, growth, and withdrawals, but it's an option nonetheless.

If you don't plan ahead for healthcare costs in retirement, you might end up struggling financially as a senior. And, you might end up skimping on care and suffering as a result. To avoid that, read up on healthcare in retirement and Medicare, and do your best to save for that expense so there's money dedicated to it.