Most seniors learn the hard way that they don’t have enough money saved for retirement healthcare costs. This is predominantly because they expect Medicare will cost less and cover more than it actually does.
According to Fidelity, the average couple in today’s world would need $285,000 to cover healthcare expenses in retirement. This estimated total includes things like Medicare premiums, long-term care expenses, and more.
The Blackstone Group surveyed middle-income baby boomers at the end of 2018 and found that seventy-nine percent of them don’t have anything saved for healthcare in retirement. Only four percent have at least $100,000 saved.
Forty percent of the survey’s participants rank healthcare savings as having low priority. However, healthcare costs in retirement should be one of your top priorities when it comes to saving for retirement.
Although many expect Medicare to be free and cover all healthcare expenses, that is not the case. While most people earn premium-free Medicare Part A, you still must pay for other parts of Medicare. For example, Medicare Part B runs most people $135.50 a month in 2019.
Other parts of Medicare, such as Part D, Medicare Advantage, and Medigap, also have monthly premiums. Part D is how you will get coverage for prescription drugs, while Medicare Advantage and Medigap help lower your out-of-pocket expenses.
According to the survey mentioned above, fifty-six percent thought that Medicare would pay for long-term care if they were to need it. While some Medicare Advantage plans offer new long-term care benefits, Original Medicare does not. This is where healthcare in retirement can get extremely expensive.
To prepare for the cost of Medicare as well as the possibility of long-term care, you should consider enrolling in a health savings account pre-retirement.
What is a Health Savings Account?
A health savings accounts, or HSA, is a savings account you can contribute pre-taxed money to help pay for qualified medical expenses such as deductibles, copayments, coinsurance, and premiums. Long-term care expenses are considered as a qualified medical expense too.
To enroll in a health savings account, you must be enrolled in a high deductible health plan. Most employers offer these. If you have your health savings account through your employer, your employer may also contribute money to your account.
The maximum allowed contribution for an individual in 2019 is $3,500, while the maximum for a family is $7,000. For enrollees who are at least 55 years old get to contribute an additional $1,000 per year.
You can also enroll in a health savings account through your bank. Some health savings accounts have interest rates that can help grow your savings. The easiest way to save money with a health savings account is by setting up an automatic electronic funds transfer. This way, your savings money each month without having to think about it.
Another great feature of health savings accounts is that you can withdraw money from your account to pay for non-medical expenses. The only catch to this is that you have to pay taxes on the money you withdraw for non-medical purposes.
Health Savings Accounts and Medicare
Once it comes time to retire and enroll in Medicare, you will have to stop all contributions to your health savings account. You are legally required to do this before your Medicare is active. You can be penalized if you have any part of Medicare active while contributing to your own health savings account.
However, if you have a younger spouse who is still working and has a health savings account, you can contribute to it. This allows you to continue saving the maximum amount for as long as you possibly can.
Once your spouse retires and enrolls in Medicare, the amount saved should help you both with your healthcare costs in retirement.