Most pre-retirees badly underestimate their health care costs in retirement. While no individual has any idea what his health care needs are at some distant point, a look at the averages is pretty frightening.
Medicare has significant gaps in coverage. Let’s say a couple both age 65 retired today. They would need an additional $285,000 to cover their health costs according to Fidelity’s Investment annual Retiree Health Care Cost Estimate. That’s $135,000 for Mr. Average and $150,000 for Mrs. Average.
Of course, these costs are in addition to the cost of Medicare Part A and B. Those costs vary depending on your filing status and adjusted gross income. Those costs range from $144.60 to $491.60 per person per month. Add on as much as $76.40 per person per month for Part D coverage.
These costs have only gone up at a rate that exceeds the average inflation. So, a couple that is age 35 planning to retire in 30 years might estimate their costs $516,000 even if their inflation estimate is only 2%.
But, it gets worse. If either spouse requires long term health care add in an additional $100,000 per person per year depending on where they live and the extent of their care needs.
For most retirees these are not trivial numbers. There is only one viable solution: More retirement capital. Plan for the additional expenses.
Fortunately, there are at least three widely available tax efficient techniques to assist in accumulating the additional funds that may be required.
- Increase your contribution to your company’s 401(k). This is a simple no-brainer way to systematically build capital. It has the advantages of tax deduction, tax free accumulation, and creditor proofing.
- If available at your company utilize a high deductible health insurance plan coupled with a Health Savings Account (HAS). The savings from the high deductible premium can be deposited into a HAS which grows tax deferred until withdrawn tax free for qualified health costs which can include the annual cost of your Medicare premiums (but not Medicap plan premiums).
- Start or increase contributions to a Roth IRA. While not currently tax deductible, this might be the lowest cost, most flexible tax favored account available to you. Each individual and his/her spouse could contribute up to $6000 per year ($7000 if over age 50) which will accumulate tax free and allow tax free withdrawals for any purpose beyond age 59 ½. Prior to 59 ½ deposits can be withdrawn tax free while earnings can continue to accumulate until withdrawn after 59 ½. Remember you can still do “back door Roth” no matter what your income. Roth has two other benefits to keep in mind: No Required Minimum Distributions, and totally tax free to heirs.
No one wants to be old, sick and broke. Health costs during retirement are not an insignificant part of your retirement budget. Account for them and fund them as part of your overall financial planning. Otherwise, a failure to plan is to plan for failure.