There’s no one-size-fits-all solution to managing healthcare costs in retirement. Retirement savers and current retirees may be able to shield themselves from the destabilizing financial effects of unexpected healthcare costs by pursuing a multi-faceted approach that combines different types of savings solutions and insurance products.
Budgeting for Healthcare in Retirement
Determining how much you need to save to cover your healthcare costs in retirement can feel impossible in your working years. No one has a crystal ball, or the ability to predict exactly how long they will live, the level of inflation they will experience in their lifetime, what types of healthcare challenges they will face in retirement, or whether they will require assisted living, memory, or nursing care.
Despite these limitations, you can still make some informed predictions and plan accordingly. This often involves nailing down the parts of your finances that are predictable:
- Calculate your total predicted retirement income from all your different sources, including Social Security, retirement savings accounts, pensions, rental income or part-time work
- Try to estimate your total fixed and variable expenses, preferably in separate categories
- Adjust your estimates for inflation
- Plan as if you will incur unexpected costs, like medical emergencies or major home repairs
This type of budgeting is inherently difficult due to the uncertainty of many key variables. However, nailing down what you can predict, such as your income sources, may allow you to better plan your fixed and variable expenses. Retirees who build a buffer specifically for medical costs and healthcare may be able to more easily adjust their budget in retirement should the need arise.
Should You Enroll in a Health Savings Account (HSA)?
HSAs are tax-advantaged healthcare savings tools that can help eligible retirement savers manage healthcare expenses after they retire. These accounts are primarily available to those enrolled in high-deductible health plans (HDHPs).
If you do enroll in Medicare Advantage when you turn 65, you may no longer be able to contribute to the HSA you built up while you had an HDHP during your working years. However, the money accumulated in your HSA can still be used tax-free on qualifying medical expenses, including paying Medicare premiums and all types of out-of-pocket medical expenses.
If you are saving for retirement and are eligible to make contributions to an HSA, doing so might be advantageous for managing healthcare costs later.
Staying Healthy for as Long as Possible
Although not strictly a budgetary tool, living healthy can be a powerful tool for managing healthcare costs in retirement.
This includes leveraging the preventive care benefits available to you throughout your life. Wellness visits and screenings can catch serious problems earlier when treatment and management is more affordable.
Retirees who aren’t forced to manage preventable conditions may have fewer healthcare costs in retirement.
Understanding How Withdrawals for Healthcare Expenses Affect Tax Liability
The tax implication of withdrawals from retirement savings accounts can vary depending on the account and the purpose of the withdrawal. Withdrawals from pre-tax accounts, such as traditional IRAs or 401(k)s, are typically taxable, regardless of their use, even if those withdrawals are to cover medical expenses. However, retirees may qualify for medical expense tax deductions depending on their medical costs for the year.
Withdrawing from a Roth IRA or another after-tax account to cover healthcare expenses, if one is available, may help limit the negative tax implications.
Dealing With Unexpected Healthcare Costs
Establishing a dedicated healthcare emergency fund is one of the most straightforward ways to prepare for unexpected costs. Retirees may also want to enroll in Medigap or more specialized insurance options, like critical illness or cancer insurance.
Some of these plans provide lump-sum payments upon diagnosis of a specific type of condition and may help policyholders pay for treatments or services that aren’t covered by their existing policies.
Get Advice on Budgeting for Your Medical Costs in Retirement
Phoenix retirement savers and retirees seeking advice on managing medical costs may benefit from a consultation with the financial advisors at Fullerton Financial Planning. We can walk you through Medicare Advantage and Medigap policy options, annuities or life insurance products with hybrid features designed for medical emergencies, and other tools to help you budget for the unexpected.
Call us at (623) 974-0300 to schedule a consultation.
