The Advantage Of Healthcare In Your Retirement Portfolio And Its Costs

A healthcare bucket is an essential component of a savvy retiree’s portfolio, dedicated specifically to meeting the medical expenses that may occur during their retirement. This strategy, often overlooked, serves as a financial safeguard, ensuring that the cost of healthcare doesn’t eat away at your hard-earned retirement savings. By setting aside a portion of your nest egg for this purpose, you’re not just preparing for an eventuality but also securing your peace of mind.

The truth is, healthcare isn’t just another item on the retirement checklist; it’s a critical consideration. As medical expenses have a tendency to skyrocket, especially in the later years of your life, failing to plan is, as they say, planning to fail. You may consider consulting with a professional financial advisor who can account for your healthcare needs and create a suitable plan for tackling them during your retirement years.

In this article, we will delve deeper into the importance of including a healthcare bucket in your retirement portfolio, the costs involved, and understand the advantages that it can unlock for you.

The need for healthcare in retirement

Healthcare costs in retirement are rising, with a projected annual increase of 5.1%, expected to reach a staggering $6.8 trillion by 2030, according to the Centers for Medicare and Medicaid Services.

Here’s a breakdown of healthcare costs:

Medications (17%): Most of your retirement healthcare expenses will be dedicated to generic, branded, and specialty drugs.
Medicare premiums (39%): Medicare Part B and Part D premiums account for a substantial portion of retiree expenses. These premiums cover doctor appointments and prescription drug costs. Moreover, the monthly premium for Medicare Part B will be $174.70 for 2024, an increase of $9.80 from $164.90 in 2023.
Other medical expenses (44%): This category includes copays, coinsurance, deductibles for doctor and hospital visits, and various additional medical costs.

5 advantages of including a healthcare bucket in your retirement plan

1. Provides financial protection during retirement

A dedicated healthcare bucket in your retirement portfolio provides a safety net for managing healthcare costs. With the rising monthly cost of healthcare in retirement, having funds set aside specifically for medical expenses can help ensure you are financially prepared for any unexpected health-related expenses. It also helps prevent depleting your retirement savings and assets, allowing you to maintain your lifestyle.

2. Helps prepare for the long-term

Incorporating a healthcare bucket allows for effective long-term planning. You can gradually accumulate funds over your working years, ensuring that you have enough to cover healthcare expenses during retirement. This helps you avoid the stress of last-minute financial arrangements for healthcare costs.

3. Offers peace of mind during retirement

Knowing that you have a dedicated healthcare fund offers peace of mind. It alleviates concerns about how to cover retirement healthcare costs, reducing anxiety and allowing you to enjoy your retirement years without the constant worry of medical expenses.

4. Allows you to take advantage of tax benefits in retirement

Health savings accounts (HSAs) and other tax-advantaged healthcare investment options offer tax benefits. Contributions to these accounts are tax-deductible, and withdrawals for qualified medical expenses are tax-free. This means you can minimize your tax liability while saving for healthcare costs in retirement.

5. Offers protection of other assets

By having a dedicated healthcare bucket, you shield your other assets from being used for medical expenses. It also helps ensure that your retirement savings and investments remain intact for your general living expenses and financial goals, enhancing the overall protection of your financial assets.

Understanding the monthly cost of healthcare in retirement

Healthcare costs in retirement are a growing concern. According to a recent study, a typical retired couple aged 65 in 2023 can expect subsequent medical expenses of $315,000 during the course of their retirement. This alarming figure underscores the importance of saving in advance so you can tackle healthcare costs as they occur.

Additionally, the amount you require for retirement healthcare costs varies based on factors such as your retirement age, location, overall health, and life expectancy. Your choice of accounts, such as 401(k), HSA, IRA, or taxable accounts, will also impact the amount needed. Your retirement tax rates and gross income also play a role in determining how much you will eventually save.

If you don’t plan for escalating healthcare costs, you risk depleting your retirement nest egg at a faster rate and this may be problematic, given the uncertainty about the number of years you may live after you have retired.

How to plan for healthcare costs in retirement

1. Estimate your healthcare expenses

When planning for healthcare costs in retirement, it’s essential to estimate your potential expenses accurately. To create a realistic estimate, consider factors such as your current health, family history, lifestyle, and any chronic conditions that may require ongoing treatment. Consulting with a financial advisor can help you make a more precise estimate of your healthcare costs.

2. Know the inclusions and exclusions of Medicare before you retire

Medicare is a federal health insurance program primarily designed for individuals aged 65 and older, as well as certain younger individuals with disabilities.

Here’s a comprehensive breakdown of what Medicare covers and doesn’t cover:

What Medicare covers:

a. Medicare Part A (Hospital Insurance) covers inpatient hospital care, skilled nursing facility care, hospice care, and some home healthcare services. Most beneficiaries receive Part A without premiums if they or their spouse paid Medicare taxes while working.

b. Medicare Part B (Medical Insurance) covers medically necessary services like doctor visits, outpatient care, preventive services, and some medical supplies. Beneficiaries pay a monthly premium for Part B.

c. Medicare Advantage (Part C) combines Part A, Part B, and often Part D into a single plan offered by private insurance companies. It may also offer additional benefits like dental and vision coverage.

d. Medicare Part D (Prescription Drug Coverage) provides prescription drug coverage through private plans approved by Medicare. Beneficiaries pay a premium for Part D coverage.

What Medicare doesn’t cover:

a. Long-term care: Medicare does not cover most long-term care services, including nursing home care. Coverage for these services may require separate long-term care insurance.

b. Dental, vision, and hearing: Routine dental care, eyeglasses, and hearing aids are generally not covered by Medicare. Some Medicare Advantage plans may offer limited coverage.

c. Cosmetic surgery: Elective cosmetic procedures are among the exclusions of Medicare.

d. International care: Medicare typically doesn’t cover healthcare services received outside the United States.

e. Most prescription drugs: While Part D covers prescription drugs, not all medications are included, and there may be out-of-pocket costs.

f. Alternative therapies: Services like acupuncture or chiropractic care are not covered by original Medicare but may be available through certain Medicare Advantage plans.

To plan for healthcare costs in retirement, it’s essential to consider the potential gaps in Medicare coverage and explore supplemental insurance options such as Medigap policies, etc.

3. Explore long-term care insurance and Medigap

The out-of-pocket expenses for healthcare in retirement can be substantial, even with Medicare coverage. To ensure you’re well-prepared, consider the following options.

a) Medigap – Supplemental medicare insurance

Medigap, or Medicare Supplement Insurance, is provided by private insurance companies to help cover the gaps Medicare leaves. It can assist in paying for Medicare co-pays, deductibles, and coinsurance, reducing your out-of-pocket expenses. To be eligible for Medigap, you must be aged 65 or older and enrolled in Medicare Part A (hospital services) and Part B (medical insurance).

It’s, however, essential to understand that Medigap requires you to pay a premium in addition to the premiums for Medicare Part A and B. These premiums may vary depending on the plan you choose.

b) Long-term care insurance

Long-term care insurance is designed to cover expenses related to nursing home stays, assisted living, and adult daycare services. Medicare and Medigap typically do not cover these long-term care costs, making it prudent to consider long-term care insurance. Exploring long-term care insurance policies in your 40s or 50s can be a wise move because the earlier you start, the more cost-effective it can be.

To secure this insurance, you pay a monthly premium to a private insurance company. If you ever require the covered services, you can submit claims to the insurance provider.

By considering Medigap and long-term care insurance, you can better protect your retirement savings and work toward ensuring you have the necessary financial resources to maintain your health and well-being during your golden years.

4. Enroll in a Health Savings Account (HSA)

The Health Savings Account (HSA) is a tax-advantaged investment for those with high-deductible health plans, offering tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses. These features make it an effective tool to reduce taxable income and save on healthcare. At 65, the HSA evolves into a flexible asset for any expenses—medical or otherwise—enhancing retirement funds without penalties on non-medical withdrawals. Furthermore, HSAs aren’t limited to low-interest savings; you can invest in ETFs, mutual funds, and stocks, mirroring the growth potential of IRAs and bolstering your financial preparedness for healthcare costs or retirement.

5. Account for the rising inflation

Healthcare costs tend to rise with inflation, which includes the price of medical services, prescription medications, and health insurance premiums. To keep up with these increasing costs, it’s smart to invest in options like healthcare sector stocks or securities that are designed to keep pace with inflation. It’s also important to regularly update your healthcare budget for retirement, making sure it reflects the growing expenses to stay financially healthy.

To conclude

Creating a dedicated healthcare bucket for retirement helps create a safety net against the rising tide of medical expenses. Such foresight helps you prepare for the inevitable increase in healthcare costs, ensuring these expenses don’t drain your overall savings. This focused approach not only secures your finances in the present but also fortifies your future, providing a sense of security as you navigate through retirement. With a healthcare bucket, you’re not just reacting to costs; you’re planning for them, laying solid financial groundwork for managing your health needs.

Consider using the free advisor match service to get matched with vetted financial advisors who can help create a retirement plan based on your specific needs. Answer some questions about your financial needs, and our match tool can help connect you with 1 to 3 advisors who are best suited to help you.

For further information on creating a suitable retirement plan for your unique financial requirements, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.