The Impact of Rising Health Care Costs on Retirement Income

Did you know that the average cost of health care for a retired couple in 2018 was around $280,000? Because people don’t often want to believe or think about needing health care, this is an area often overlooked in retirement. While many understand that health care costs can affect them, most probably haven’t calculated the full impact that it could have on their retirement savings.

Let’s talk about the ways that rising health care costs can impact your retirement income.

Medicare Coverage & Retirement Income

Retirees typically don’t have access to health insurance since companies aren’t required to maintain health coverage for retired employees. Because of this, Medicare is necessary for most retirees to cover the cost of health care. Medicare (Part A and Part B) covers a good number of health care services, including:

• Inpatient hospital care
• Skilled nursing facility (short-term)
• Hospice
• Lab tests
• Surgery
• Home health care
• Doctor and other health providers’ services
• Ambulance service
• Durable medical equipment
• Mental health
• Some preventative services

However, what Medicare doesn’t cover, and what can derail a person’s retirement savings, includes long-term care, most dental care, eye exams for glasses or contacts, dentures, cosmetic surgery, acupuncture, hearing aids and exams for fitting them, and routine foot care.

Medicare Part A is typically covered by your Social Security, but Medicare Part B is around $135 a month as of 2019. Medicare also requires that retirees pay a deductible and coinsurance for inpatient hospital stays. That deductible is on average $1,364 per beneficiary period plus a more than $300 coinsurance cost for any days past 60.

So, for retirees who end up in the hospital or a nursing facility for 61 days or more, those costs start to become significant.

Long-Term Care Costs

Because Medicare doesn’t cover long-term care stays beyond 60 days, the costs of long-term care can affect your retirement unexpectedly and significantly. The average cost of a semi-private room at a nursing home is $6,844 a month and $7,698 for a private room. That can quickly eat into your retirement savings, especially if you need or your spouse needs to stay in for a year or more. The need for long-term care is more prevalent than most retirees realize, with 70% of retirees over the age of 65 needing long-term care at some point in their lives. And 20% of those retirees will need long-term care for more than five years.

This means that the majority of retired couples need to plan for an additional $82,000 a year just in case long-term care is needed.

How to Plan for the Costs of Health Care in Retirement

While you can’t predict what your health journey will look like in retirement, there are several ways to plan for health care costs. Some retirees purchase long-term care insurance, while others purchase annuities with long-term care riders attached. Both of these financial products can help cover the costs of long-term care in retirement, covering a stay in a nursing home, assisted living facility, adult day care center, or home health aides. Long-term care insurance requires a physical exam before qualifying for a policy.

Some retirees add additional coverage through an HSA, or Health Savings Account. These accounts allow retirees to offset medical expenses. An HSA accrues money tax-free and allows the retiree to take funds out for qualified medical expenses like deductibles, copays, and coinsurance. A family can contribute up to $6,900 a year or $3,450 per individual.

Another way to help offset future health care costs is to proactively make healthy lifestyle choices. Your current health choices can affect not only your future health but also your future retirement savings. By “course-correcting” some of your current habits, you might be able to help prevent or reduce the impact on your retirement savings. Let’s say, for example, that you smoke. The financial impact of smoking (cost of cigarettes, avoiding smoker penalties on insurance, and wage differential) is around $12,000 a year. Imagine putting that toward your retirement income! The same can be true of other health decisions, like exercising, eating a healthy diet, and reducing stress.

To learn more about the impact of health care on your retirement and what you can do about it, register for a Retirement Today course in your area, a retirement basics course for baby boomers across the country.