The investment information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer consulting or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
At age 65, some couples may need $413,000 to cover health care costs in retirement, according to a January report from the Employee Benefits Research Institute. This is an extreme case, representing two people with high prescription drug costs—but it’s not out of the realm of possibility.
“It’s one of the hardest expenses to predict in retirement,” says Nancy Naun, a certified financial planner in Cherry Hill, New Jersey.
Your costs will depend on your insurance choices, your health, prescription drugs, and your city. (Some places have higher costs than others.) As you approach retirement, try these tactics to manage future health care costs.
Save in a health savings account
If you have a high-deductible health plan and access to a health savings account (HSA), max it out. The money you save is triple tax-deductible: you pay no taxes on the money you save, the interest you earn, or any withdrawals used for qualified health expenses.
“I think most people use them as they go, which is good, too,” says Ed Snyder, a CFP in Carmel, Indiana. “But I think there are even more benefits to using the investment account in them [and] leaving that money to be invested over many years, just like a retirement account.
In 2024, you can save up to $4,150 for an individual health savings account and up to $8,300 for family coverage. If you’re 55 or older, you can contribute an additional $1,000. (Note: You can’t enroll in an HSA after you’ve signed up for Medicare.)
Choose the right Medicare plan
After you turn 65, advisors generally recommend choosing Original Medicare with Medicare Supplement Insurance or Medigap. Because Medigap plans cover many Medicare out-of-pocket costs, it keeps your monthly healthcare costs predictable.
Many seniors are attracted to the $0 premiums of most Medicare Advantage plans, but using these private health plans means you may be limited to in-network doctors and hospitals. “I’ve seen a lot of situations where people have to go to a provider that doesn’t cover them and pay the whole bill themselves,” says Melinda Cowhill, co-founder and CEO of 65 Incorporated, which offers Medicare guidance.
Out-of-pocket maximums for Medicare Advantage plans can also go up to $8,850 per year in 2024, and that doesn’t include your Medicare Part B (health insurance) premiums. However, if you can’t afford a Medigap plan, Medicare Advantage may be the better option. Without Medigap, Original Medicare has no out-of-pocket maximum.
Get help with tax planning
If your income exceeds a certain threshold, you’ll pay more each month for Medicare Part B and Medicare Part D prescription drug coverage (if you have it). This is where it helps to be strategic about your retirement income by making sure you have both pre-tax and after-tax accounts to draw from if needed. (Withdrawing from pre-tax accounts boosts your income.)
“If you’ve saved a lot of money in tax-deferred vehicles and haven’t planned to either convert to a Roth or spend that money, you could find yourself with a much larger monthly Medicare premium than you think,” says Naun. .
Pay off your mortgage
If you are 62 or older and have at least 50% equity in your home, you may be able to access a reverse mortgage later if you really need it. It’s a loan or line of credit against the appraised value of your home — and you don’t have to make any payments. The loan is paid off when you move out or die.
Reverse mortgages once had an intimidating reputation, but today’s products are safer, Naun says. “There was abuse many, many years ago,” she says. “It was cleaned up and it’s a really cool tool to carry in your back pocket.”
Keep in mind that reverse mortgages require at least one borrower to live in the home, and they cost more than a traditional home mortgage over time. Work with an advisor who is familiar with the product before taking the plunge.
Consider a HELOC
If you’re younger than 62 and still working, a home equity line of credit (HELOC) can provide you with a stream of income to draw on later if you need it. (It’s easier to qualify for a HELOC while you’re still earning a salary.)
The catch: Unlike a reverse mortgage, a HELOC requires you to make payments. “At some point in the future, you’ll have to pay it back,” Naun says.
Keep things in perspective
After all, don’t lose too much sleep over the big numbers. Think how embarrassing it would be if experts also told you how much you need to save to cover 30 years of food or utility bills after retirement. With proper planning, healthcare costs can be manageable.
“A reasonable expense is about $6,000 a year for an individual, and if you calculate it on a monthly basis, that’s $500 a month,” says Dick Power, CFP in Walpole, Massachusetts. “That $500 a month usually includes your insurance coverage and your co-pays.”
This article was written by NerdWallet and originally published by The Associated Press.
More from NerdWallet
Kate Ashford, CSA® writes for NerdWallet. Email: [email protected]. Twitter: @kateashford.
The article Can You Afford Health Care After Retirement? originally appeared on NerdWallet.
