Planning for health-care expenses in retirement
With health-care costs approaching on average nearly $10,000 per retiree per year,1 it's important to plan now to ensure that you have enough money to last your lifetime. According to the New Retirement Mindscape® study published by Ameriprise Financial,2 health insurance tops the list of concerns for pre-retirees.
Health-care expenses can be easy to underestimate because health changes are unpredictable, and the financial impact of dealing with a serious illness can be devastating. Today's retirees are also living longer, often spending as many as 30 years in retirement. This could bring the total health-care costs you can expect to pay in retirement even higher. With inflation chipping away at their fixed incomes, retirees are particularly vulnerable to unpredictable costs.
How much do I need to save?
Your retirement health-care costs will vary depending on your income, when you retire, where you live, your health status and your life expectancy. When estimating your retirement health-care costs, plan to have enough money saved to cover premiums for your chosen Medicare programs, copays, deductibles and out-of-pocket expenses.
The amount needed for retirement health-care expenses will differ for each individual. A couple with an average life expectancy, retiring in 2006 at age 65, could expect to need $295,000 to cover their health insurance premiums and out-of-pocket costs during retirement. Furthermore, estimated health-care expenses increase dramatically if individuals are assumed to live longer than average. For example, the estimated health-care expenses of the 2006 retirees mentioned above almost double — to $550,000 — if it's assumed that they will both live to age 95.3
Should I open a health savings account (HSA)?
An HSA can be a great way to save for retirement health-care expenses. HSAs are tax-advantaged savings accounts available to individuals who are covered by a qualifying high-deductible health insurance plan.
HSAs offer three types of tax advantages:
- Contributions, whether made by an individual or an employer, are typically not included as taxable income
- Investment earnings on HSAs accrue tax free
- HSA funds withdrawn to pay for eligible medical expenses are not taxed. For 2009, maximum annual HSA contribution limits are $3,000 for individuals with self-only coverage and $5,950 for family coverage. Individuals age 55 to 65, who are not yet Medicare eligible, may contribute an additional $1,000 for 2009.4
HSA account holders can use their funds to pay for eligible medical expenses as they occur, or can accumulate funds in their HSAs for future use, including paying for eligible health-care expenses in retirement. HSA funds that are used for ineligible medical or other expenses are subject to income tax and a 10% penalty if the account holder has not yet turned 65. Funds contributed to an HSA typically reside in an interest-bearing account, but many HSA providers also offer a variety of mutual fund investment options for accounts that meet certain criteria.
Should I count on my employer to provide retiree health benefits?
The number of employers offering retiree health benefits or medical coverage has been declining for years.5 Employers that continue to offer benefits are shifting more of the cost to retirees. Even if your employer offers coverage today, it may be wise to plan for two scenarios: one with employer coverage and one without.
What if I retire early?
Retiring before becoming eligible for Medicare can create an additional financial burden if you do not have retiree health insurance through your employer. Early retirees should consider leveraging COBRA or purchasing a private health insurance plan until they become eligible for Medicare. Health insurance plans purchased through a private company typically have higher premiums than do group policies available through employers. If you plan or need to retire early, it is important to try to ensure that your retirement health-care savings includes funds for private health insurance premiums and other potential out-of-pocket costs.
What about long-term care?
A 65-year-old retiring today is expected, on average, to spend three years in long-term care.6 Since Medicare offers limited, if any, coverage for long-term care costs, you need to plan for this major expense. The average cost of a private room in a nursing home in 2007 was $75,000 per year.7 These costs are predicted to rise significantly in the future, and costs vary widely by region and type of facility.
One way to plan ahead is to purchase long-term care insurance. If you know where you plan to live in retirement, be certain the benefit on your long-term care insurance policy will be enough to cover the average cost of long-term care in that region. Premiums will vary based on insurer; however, most companies have rates based on age, health status and level of benefit.
What steps can I take today to prepare for health-care costs in retirement?
- Set your savings goal high enough to account for future changes in your health. While you may be relatively healthy now, unexpected changes in health can quickly increase your monthly and annual out-of-pocket costs.
- Analyze your current savings and investment strategy. Will it be enough to reach your goal? Do you have an appropriate mix of investments to help with near-term expenses if you retire early, as well as later expenses like long-term care? Do you have a good mix of taxable and tax-free investments?
- Evaluate long-term care insurance options. Without long-term care insurance, you will be responsible for nearly all costs associated with this care.
- Use preventive health-care programs offered through your employer or insurance provider and make appropriate lifestyle changes. A healthy lifestyle can often reduce overall health-care expenses.
Potential retirement health insurance options
| COBRA | Allows temporary continuation of employer-sponsored health coverage |
|---|---|
| Private health insurance | Self-only and family health insurance available through private health-care companies |
| Medicare | Part A — hospitalization insurance Part B — medical insurance (e.g., doctor's visits and outpatient services) Part C — Medicare Advantage (combines Part A and Part B, and sometimes Part D) Part D — prescription drug coverage |
| Medigap | Medicare Supplemental Insurance that covers certain expenses not covered by Medicare Parts A or B |
| Long-term care insurance | Policy to cover long-term care expenses |
| Medicaid | Coverage for low-income individuals (benefits and eligibility vary by state) |
| Employer-sponsored retiree health benefits | Coverage for early retirees and/or Medicare-eligible retirees (availability and coverage vary by employer) |
Is my retirement savings plan on track to cover my health-care costs?
There are many factors that can affect health-care costs, including personal factors such as age and health status and external factors such as provider costs. Make sure you are prepared and protected by establishing a health-care savings goal or including additional health-care savings in your retirement plan. Your financial advisor can help you evaluate your retirement savings plan, explain which health-care expenses to save for and research appropriate long-term care insurance options. If you don't have a financial advisor, contact us at (800) AMERIPRISE or find a financial advisor in your community.
1 Calculation based on current median costs for Medicare premiums and deductibles, Medigap insurance, long-term care insurance and other health-care insurance. Medicare, Medigap, and other program costs and out-of-pocket expenses can change. Always review the most current policy handbook for the current program benefits.
2 The New Retirement Mindscape study was conducted in August 2005 by Ameriprise Financial in conjunction with Age Wave and Harris Interactive.
3 Employee Benefit Research Institute, Issue Brief, No. 295, Savings Needed to Fund Health Insurance and Health Care Expenses in Retirement, July 2006.
4 U.S. Treasury 2009 HSA Indexed Amounts (treas.gov).
5 Buchmueller, Johnson and Lo Sasso, 2006. Trends in retiree health insurance, 1997–2003.
6 Kemper, Peter; Komisar, Harriet L.; Alecxih, Lisa. Long-Term Care Over an Uncertain Future: What Can Current Retirees Expect? Inquiry. Volume 42, Winter 2005/2006.
7Genworth Financial 2007 Cost of Care Survey.
Financial planning services and investments are offered through Ameriprise Financial Services, Inc. Member FINRA and SIPC.