#1) Adopt tax efficiency: Saving and investing in tax-advantaged accounts can help pay for healthcare costs in retirement. This is especially true for Health Savings Accounts (HSAs). Not only do HSAs provide tax-free pre-tax contributions and investment income, but your distributions for qualifying medical expenses will also be made tax-free.
Our savings waterfall worksheet can help you prioritize your savings across different types of accounts based on after-tax growth potential.
#2) Know what your costs are today: Knowing the details related to the costs of your coverage will help you understand the expenses you may be exposed to on an annual basis.
This information will allow you to determine the appropriate amount of funds that should be set aside in your liquidity strategy* – resources that will be used to fund the next 3-5 years of spending needs.
A well-funded liquidity strategy can give you the flexibility to meet expected healthcare expenses such as premiums, as well as variable and sometimes large out-of-pocket expenses.
Expenses that are easier to predict (monthly premiums, co-payment for routine visits, and any prescriptions you currently take) should be factored into your liquidity strategy, just like other planned expenses and foreseeable (rent/mortgage, utilities, car insurance, etc.).
To ensure that you have enough resources to deal with unexpected disbursements, we suggest that you set aside enough resources to meet your health plan’s annual maximum disbursement in your liquidity strategy’s contingency fund.
#3) Estimate what your costs will look like in the future: To improve the accuracy of your healthcare spending forecasts, we recommend that you plan for a 5.9% annual increase in your healthcare spending to account for the rising cost of healthcare products and services.
You should also consider any anticipated changes in your state of residence, which may impact the cost of your healthcare and insurance options. A higher income level can also lead to higher health care costs, for example, through higher Medicare Part B premiums.
We recommend that you work with your financial advisor and tax advisor on a strategy for managing your tax bracket, such as implementing partial Roth conversions earlier in retirement to reduce the size of your required minimum distributions (RMD). This can help smooth out your taxable income to keep you out of higher tax brackets. See How to get the most out of your RMDs for more information.
#4) Protect yourself from long-term care (LTC) costs: Since Medicare does not cover the vast majority of LTC expenses, we suggest that health care and long-term care be treated separately in the planning process.
Our report, Long-Term Care: A Source of Financial Fragility in Retirement, provides a good starting point for planning for long-term care.
#5) Review your expenses annually: Due to the cumulative effect of inflation, a year of higher than normal inflation will affect all future costs.
There’s no way to know exactly how your expenses will change, but updating your health care costs in your financial plan will help increase the accuracy of your estimated future costs.
We recommend that you review your financial plan annually with your UBS financial advisor to ensure that your healthcare expenses are up to date.
Main contributor: Ainsley Carbon
This content is a product of the Chief Investment Office of UBS.
Read the full report The Monthly Modern Retirement: Healthcare in Retirement March 21, 2022.
*Times may vary. Strategies are subject to each client’s goals, objectives and relevance. This approach is not a promise or guarantee that wealth, or financial results, can or will be achieved.