How much should you expect to spend on medical expenses in retirement?

If you’re saving for retirement, you’re likely building up a nest egg that will cover the food, housing, transportation, and medical expenses you’ll have in your golden years. You are also probably planning at least 15% of your salary and anticipating a savings withdrawal rate of no more than 4%.

Even if you’re doing everything right to save for your retirement, you just might not have enough money set aside. A recent report from Boston College’s Center for Retirement Research found that a significant portion of retirees’ savings and Social Security benefits go toward medical expenses.

Below, Select takes a closer look at what percentage of retiree income is spent on medical expenses and how you can better prepare to manage those costs in retirement.

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The cost of medical expenses in retirement

In the paper, the researchers used data from the 2018 Health and Retirement Study to see how much of retirees’ Social Security benefits and total retirement income was spent on medical expenses such as insurance premiums. health insurance, prescription drugs, surgeries and doctor visits. And while it might seem like Medicare means paying lower medical bills, it didn’t.

The study found that in 2018, 12% of the median retiree’s total retirement income was spent on medical expenses. For the median retiree, 25% of their Social Security benefits went to medical expenses. In total, the median retiree spent $4,311 on medical expenses, with most of that money going to Medicare premiums.

In 2022, the monthly premium for Medicare Part B, which is medical insurance, was $170.10.

“With personal health care expenses eating away at retirement income and Part B premiums on the rise, it’s understandable that many retirees likely feel it’s hard to make ends meet,” the researchers noted.

It also turns out that people preparing for retirement aren’t good at predicting how much they’ll spend on medical expenses later in life, as another recent study from Boston College’s Center for Retirement Research found.

According to Fidelity Retiree’s 2022 Health Care Cost Estimate, the average retired couple at age 65 can expect to spend about $315,000 on health care expenses in retirement.

How to prepare for medical expenses in retirement

So if you’re planning for your retirement, how can you best prepare for these medical expenses in advance? There are several ways to use tax-advantaged accounts and insurance products to help cover healthcare costs.

401(k)s and IRAs

First, you should focus on maximizing tax-efficient investment accounts such as your employer-sponsored 401(k) or a traditional or Roth IRA. With a 401(k) and a traditional IRA, the money won’t be taxed until you withdraw it in retirement. With a Roth IRA, the money is taxed up front, allowing your investments to grow tax-free over time.

If your employer offers a 401(k) match, take advantage of it because it’s essentially free money. If you qualify for a traditional or Roth IRA, consider opening one with Charles Schwab, Fidelity Investments, Vanguard, or Betterment. Select ranked these companies as offering the best IRAs based on factors such as variety of investment options, low fees, and ease of use.

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Health savings accounts

Additionally, if you are enrolled in a high-deductible healthcare plan, you should consider contributing to a Health Savings Account, a tax-advantaged investment account that can be used to pay for medical expenses.

For 2022, the annual contribution limit is $3,650 for single earners and $7,300 for families. People aged 55 and over are eligible for catch-up contributions of an additional $1,000 per year. Note that if you don’t use the money you’ve saved in a given year, the funds will roll over to the next year.

Generally, health savings accounts offer three major tax benefits. Contributions are tax deductible, which means they will reduce your overall taxable income. You will also not pay taxes on your contributions.

You can then withdraw HSA funds for qualified medical expenses such as co-pay, co-insurance, prescription drugs, and menstrual products. Once you reach age 65, you can use funds from your HSA to cover all expenses, not just out-of-pocket medical expenses.

Plus, if you choose to invest your funds, you won’t have to pay taxes on your earnings.

Similar to a traditional or Roth IRA, you can invest your HSA’s funds in exchange-traded funds, mutual funds, and stocks. You will first want to review the rules for your health savings account, as some of them have a minimum amount that must be met before you can start investing your funds.

Dependency insurance and Medigap

If your retirement healthcare costs are still high even after Medicare coverage, you can opt for supplemental Medicare insurance known as Medigap.

Medigap is provided by private insurance companies and can be used to fund Medicare copayments, deductibles, and coinsurance. Individuals must be age 65 or older and must be enrolled in Medicare Part A (hospital services) and Part B (medical insurance). With Medigap, individuals pay a premium for supplemental insurance in addition to the premiums they must pay for Medicare Part A and B.

Another type of insurance you can consider is long-term care insurance, which is used to fund nursing home stays, assisted living facilities and adult care costs. Since Medicare and Medigap generally don’t cover these expenses, it may be a good idea to start buying a long-term care insurance policy in your 40s or 50s. Assisted living and nursing homes can be incredibly expensive – according to a 2021 cost of care survey by Genworth, the average cost of a semi-private room in a nursing home was $7,908 per month , while a private room costs $9,034 per month.

With long-term care insurance, you pay a premium each month to a private insurance company. If you ever need the covered services offered by the plan, you then submit claims to the company.

At the end of the line

When saving for retirement, you should be prepared for a significant portion of your retirement income to go towards medical expenses – 12% of the median retiree retirement income went to cover medical expenses.

You can save for your retirement by taking advantage of the variety of different tax-efficient investment accounts that exist, such as 401(k), traditional and Roth IRAs, and health savings accounts. Additionally, you should consider purchasing Medigap or long-term care insurance if you anticipate significant health care expenses in retirement.

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff alone and have not been reviewed, endorsed or otherwise endorsed by any third party.

About John Tuttle

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