Most people nearing retirement underestimate what it will cost to pay for health care.
According to Fidelity's annual survey on health care costs, a 65-year-old couple retiring in 2013 would need an estimated $220,000 to cover their health care in retirement. The study includes the following for its estimate: Premiums for Medicare (part B and D); Medicare copayments; coinsurance and deductibles; and out-of-pocket costs for things like eyeglasses and hearing aids.
These estimates don't include dental costs and long-term care costs like nursing home care, which would make that estimate even higher. Although the estimate is less than last year's number by about $20,000, it’s still a daunting figure for most retirees. However, there are steps people can take to prepare for this cost.
Put away money into a HSA
If offered by your company health care plan, a Health Savings Account, or HSA, is one way to put away money for health care in retirement. There are several advantages to the HSAs:
Contributions are tax deductible and they can be taken out for health care costs tax-free.
You also are in control of the assets, usually with some investment options, such as money market and funds.
The HSA accounts are portable, allowing you to take them with you if changing jobs.
Lastly, unlike a Flexible Savings Account (FSA) the HSA doesn't have to be used that year, it can be used for current health care or saved for later use. For example, HSAs can be used to cover costs not covered by Medicare like copays and deductibles.
Think of it as an IRA for health care. However, be aware that similar to an IRA, there is a penalty, in this case if you withdraw HSA funds for nonmedical expenses.
To fund an HSA, it is required to be enrolled in a high deductible health care plan. These have higher deductibles and lower premiums than the typical health care plan. For example, assuming in-network care, consider these comparisons for a sample company plan:
If you decide that the high deductible plan is a good fit then you have the ability to put money away pretax into a HSA. The contribution limits for 2013 are $3,250 for an individual, and $6,450 for a family. The HSA also has a catch-up contribution which is $1,000 for those over 55, meaning an individual can max out at $4,250, or a family can max out at $6,550. Just like an IRA, over time these contributions can grow to a larger amount for later use.
Take steps to be healthy
The next step is to work toward maintaining your health. There is a trend in workplace health-care plans to reward the healthy workers with lower rates. For example, a worker will pay less if they qualify with a certain number of wellness visits, aren't overweight, or don't smoke. Conversely, those who are smokers or obese will be penalized with higher rates.
This isn't the case with Medicare, the No. 1 source of health care for those in retirement. However, because Medicare doesn't cover every health care need in retirement, an additional Medigap plan (aka Medicare Supplement plan) is usually purchased. Of the $220,000 per couple needed in retirement about one-third of that is used for Medicare premiums (whether you get sick or not). So about two-thirds of the amount will be used for deductibles and copayments, which only come into play if you need treatment. That is why controlling what you can and staying healthy is so important.
Some often specified guidelines for general health:
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