4 retirement savings strategies to help you budget for health care

Key Points

  • Medical costs are still daunting and fewer employers are offering health care coverage for retirees, so it’s important to plan for health care costs in retirement.
  • Estimating your future needs can help you determine how much you should save.
  • Take long-term and extended care and prescription drugs into account.

The decisions you make about health care now can have a dramatic effect on your financial future. Although most people are worried about high health care costs in retirement, few have taken action to address those costs, according to the results of the Ameriprise Health, Wealth and Retirement StudySM.1

That’s despite the fact that a married couple with median drug expenses will need $265,000 to have a 90 percent chance of paying for their retirement health care costs, according to a 2017 study from the Employee Benefit Research Institute.2 That number increased from the previous year, and continues to be a daunting sum.

What can you do to make sure you have enough saved for health care in retirement? These four retirement saving strategies can help.

1. Estimate your costs wisely

The first step is looking at what coverage you may have, including employer-retiree benefits, Medicare, supplemental care, vision and dental coverage. Then you'll need to look at out-of-pocket expenses including premiums, deductibles and co-payments or co-insurance associated with each.

Keep in mind that even if Medicare covers a service or item, you may have to pay premiums, co-pays and deductibles. Also, Medicare does not always cover long-term or extended care, most dental, eye examinations related to prescribing glasses, dentures, cosmetic surgery, acupuncture, hearing aids and exams for fitting them, and routine foot care.

It's also a good idea to factor in the cost of at least one serious illness or injury and add that to your savings goals. The chances of undergoing a hip replacement, for example, increase dramatically for people 85 and older. The procedure can easily cost $20,000. Your employer or insurer may have tools available to help you estimate these and other costs.

Be sure to include what you think you'll have to pay for the highest quality care and the technological and medical advances that can make your life better. You'll also need to come up with a long-term care strategy and determine whether long-term or extended care insurance is right for you. Your advisor can help you walk through this process.

Amount a couple needs to save to cover health

2. Keep prescription drug costs in mind

Medications can often one of the biggest out-of-pocket health care expenses for retirees.

Medicare Part D offers prescription drug coverage from Medicare provided through private insurers. Each insurer provides coverage for its own list of medications, called a formulary. The medications you need may not be on every insurer's formulary, and most policies offer tiered coverage — the lowest co-pays for generic drugs and the highest for new, brand-name medications. There is some good news about Part D coverage. By 2020, the so-called donut hole, the coverage gap that kicks in after you and your insurer pay a certain amount for medicine, will be closed. As a result, Medicare recipients' out-of-pocket expenses, on average, will be reduced significantly, according to EBRI.

3. Boost savings and consider a Health Savings Account (HSA)

Let's begin by answering: how does an HSA work? In 2017, you enroll in a qualified health insurance plan with a deductible of at least $1,300 for single coverage and $2,600 for family coverage. With this high-deductible plan, you'll pay for doctor visits, tests and other treatments out-of-pocket until your deductible is met. In exchange, you're allowed contribute pre-tax dollars into an HSA to pay for qualified medical expenses.

The maximum contribution to an HSA in 2017 is $3,400 for individuals and $6,750 for families. (People age 55 and older may deposit an additional $1,000 over these limits.) Earnings on the account grow tax-free, and no taxes are paid on withdrawals used for qualified medical expenses. Any money you don't use for health care rolls over from year to year, and your account also goes with you from job to job. That's why contributing to an HSA can be a bit of a secret retirement account. All of the funds you don't use for health care when you're younger accumulate and grow tax-free, hopefully giving you a little cushion when you're older and need the funds more.

In addition, contributing the maximum to your 401(k) or other employer-sponsored retirement savings plan is another great way to boost your savings for health care in retirement. Consider supplementing those accounts with contributions to a traditional or Roth IRA or an after-tax investment account.

4. Make a long-term care plan

Long-term or extended care costs, including home health care costs, assisted living and nursing home, are not covered by Medicare and are not included in the EBRI estimates for health care costs. But, in many cases, long-term care is the largest chunk of retiree health care expenses. The national average cost of a private room in a nursing home is $92,378 per year, according to the 2016 Genworth Cost of Care Survey.

You'll need a plan for taking care of long-term care costs that may include long-term or extended care insurance. Your advisor can help you devise a plan to prepare for the unexpected.