Ways to plan ahead and ensure your health is covered
If you’re in the 50- to 60-something range, chances are you have savings tucked away for retirement. But aside from dream vacations and remaining mortgage payments, many of us might be underestimating the biggest (and most unknown) expense of all — managing our health.
A report from Fidelity Investments found that a healthy 65-year-old couple retiring in 2018 will need $280,000 to cover their health care throughout retirement. And that amount could be much higher for people with chronic conditions, such as diabetes.
“You need to plan separately for health care costs in retirement, because they are often significant,” says Matt Trujillo, a lead financial planner for the Center for Financial Planning in Southfield, Mich. He says that at least 10 percent of your annual retirement income will go toward health care, including Medicare and out-of-pocket expenses.
Here, Trujillo offers his tips for planning ahead for health care in retirement.
1. Forecast your retirement health expenses
Although it’s difficult to predict exactly what your health will look like in five, 10 or even 20 years, you can use your current health status as a guide.
Trujillo offers this rule of thumb: If you’re healthy, exercise regularly and only see a doctor once or twice a year, you should budget 10 percent of your annual retirement income for health care. But if you have a chronic disease or condition, you may need to plan for 20 percent of your retirement income to go toward health care.
If you want to retire before 65 (the age you’re eligible for Medicare), you may need to budget an extra $12,000 to $20,000 per year, Trujillo adds.
2. Sign up for a health savings account
An HSA allows you to set aside money for future medical costs — everything from health plan premiums and out-of-pocket expenses, to eyeglasses and prescription drugs. And you can save and invest money in your HSA until you need it, whether that’s tomorrow or 20 years from now.
When you withdraw money from an HSA for a qualified medical expense, you’re not taxed on it — a benefit Trujillo likes to remind his clients about. “They offer even better tax benefits than a 401(k), so I often tell clients to fund their HSA first,” he says.
There’s one catch: To have an HSA, you must be enrolled in a qualified high-deductible health plan. The Kaiser Family Foundation reports that only about one-fifth of employers offer an HSA-qualified high-deductible health plan,  so be sure to ask an HR representative at your workplace (or your spouse’s) if it’s an option. Once you transition to Medicare, HSA-qualified plans are not available, although you can use the money you’ve previously saved towards your costs once you retire.
3. Start looking toward Medicare
At age 65, you become eligible to enroll in Medicare:
- Parts A and B, also known as Original Medicare, cover inpatient and outpatient care (overnight hospital stays and regular doctor visits).
- Part C, or Medicare Advantage, often covers benefits that Original Medicare doesn’t, such as dental and vision, and may also provide prescription drug coverage. These plans also have an out-of-pocket maximum.
- Medigap can also help you fill in the coverage gaps in Original Medicare. And while you can choose either a Medicare Advantage plan or a Medigap plan, you can’t have both.
- Part D covers prescription drugs. But if your Medicare Advantage plan includes Part D coverage, you will not need purchase this plan separately.
If you retire before age 65, however, you’ll need to find insurance with a private company, either through your spouse or a state health insurance exchange.
There are important differences between the various plans, so you’ll want to compare options carefully long before you retire.