6 Ways to Protect Your Health Savings from Rising Medical Costs in Retirement

Retirement marks a time of relaxation and enjoyment after years of hard work, but it also brings financial challenges, particularly when managing healthcare expenses. You must protect your health savings in retirement, as rising medical costs may pose a risk to your financial stability during your golden years.

The cost of healthcare services, medications, and long-term care has been steadily increasing, often outpacing general inflation. According to Fidelity Investments’ 2023 Retiree Health Care Cost Estimate, a 65-year-old retiring this year can expect to spend an average of $157,500 on healthcare and medical expenses throughout retirement.

For retirees living on fixed incomes, these rising costs can quickly deplete savings, making it difficult to cover essential medical needs. Without proper planning, unexpected medical expenses could undermine even the most well-prepared retirement plans.

Strategic financial planning is essential to mitigate these risks. Retirees can protect their retirement savings by proactively managing healthcare expenses in retirement and exploring available options such as Medicare, HSAs, and long-term care insurance. Implementing effective strategies ensures that healthcare inflation does not erode the financial security you’ve worked hard to build, allowing you to enjoy a worry-free retirement.

A financial advisor can guide you on how to safeguard your health savings and tackle rising medical costs during retirement. This article covers different ways you can protect your savings and maintain financial stability during retirement.

Below are 6 ways you can protect your health savings during retirement:

1. Maximize contributions to Health Savings Accounts (HSAs)

Health Savings Accounts are one of the most effective tools for managing healthcare expenses in retirement due to their unique tax advantages. Contributions made to an HSA are tax-deductible, reducing your taxable income during your working years. Additionally, the funds in your HSA grow tax-free, and withdrawals for qualified medical expenses are also tax-exempt.

In retirement, HSAs offer even more flexibility. After age 65, you can use HSA funds to pay for Medicare premiums, including Part B, Part D, and Medicare Advantage plans. Moreover, the funds can be used for out-of-pocket medical expenses, such as copayments and deductibles. Although you can no longer contribute to an HSA once enrolled in Medicare, the funds accumulated can help cover healthcare costs throughout retirement.

2. Consider long-term care insurance (AARP and other providers)

Long-term care insurance can help protect retirees from the high costs associated with extended medical care. This type of insurance covers expenses for services that traditional health insurance or Medicare may not, including nursing home stays, assisted living facilities, and in-home care. As the demand for long-term care rises with increasing life expectancy, these costs can quickly drain retirement savings without adequate coverage.

Purchasing long-term care insurance early offers financial advantages, as premiums are typically more affordable when secured at a younger age. AARP, a well-known advocate for retirees, offers various long-term care insurance plans designed to meet diverse needs and budgets. In addition to AARP, other providers also offer policies that can be customized to help manage future healthcare expenses.

One key benefit of long-term care insurance is that you can choose the type and level of care that suits your preferences and medical needs without exhausting your savings. Policies often cover a range of services, from skilled nursing to daily living assistance, ensuring that retirees receive quality care. Moreover, many policies offer inflation protection, which helps keep coverage adequate despite rising healthcare costs. By incorporating long-term care insurance into your retirement plan, you can protect your financial future and ensure access to essential services as you age.

3. Evaluate medicare supplement plans – Medigap

Medicare Supplement Plans, commonly known as Medigap, provide critical financial protection by covering out-of-pocket costs that Original Medicare does not, such as copayments, coinsurance, and deductibles. As healthcare expenses continue to rise, selecting a suitable Medigap plan can significantly reduce the financial strain on retirees.

Medigap policies are offered by private insurers and are standardized, meaning each plan offers the same benefits regardless of the provider, though costs may vary. There are ten different Medigap plans available in most states, each labeled with a letter (A, B, C, D, F, G, K, L, M, and N). Each plan covers different combinations of healthcare costs, allowing retirees to select a plan that aligns with their medical needs and financial situation.

Evaluating Medigap plans involves considering the associated premium costs, coverage limits, and additional benefits. For example, some plans cover foreign travel emergencies, which may benefit retirees who plan to travel. Additionally, reviewing plan options annually is advisable, as healthcare needs and insurance offerings can change over time. By comparing plans and assessing your healthcare requirements, you can secure adequate coverage, minimize unexpected expenses, and ensure that your retirement savings are protected from high medical costs.

4. Maintain a healthy lifestyle

Maintaining a healthy lifestyle is essential for reducing healthcare expenses in retirement. Preventive care, including regular medical check-ups, vaccinations, and screenings, helps detect potential health issues early, minimizing the need for expensive treatments and hospitalizations.

A balanced diet rich in essential nutrients, regular physical activity such as walking, swimming, or yoga, and staying mentally active can significantly lower the risk of chronic illnesses like heart disease, diabetes, and hypertension. These conditions are often costly to manage and can quickly erode retirement savings if not prevented or controlled.

Additionally, avoiding harmful habits like smoking and excessive alcohol consumption further reduces the risk of severe health problems. Mental well-being also plays a critical role in overall health; practices like meditation, social engagement, and hobbies can help maintain cognitive function and emotional balance.

Investing in a healthy lifestyle helps enhance your quality of life and leads to long-term financial benefits by reducing the need for extensive medical care. Retirees who prioritize their health can enjoy their retirement with fewer medical expenses and greater financial security.

5. Plan for healthcare inflation

Healthcare costs have historically risen faster than general inflation, making it crucial for retirees to plan accordingly. For instance, as per a report, from 2000 to 2024, medical care prices increased by 121.3%, while overall consumer prices shot up by 86.1%.

This trend indicates that healthcare expenses can significantly erode retirement savings if not properly anticipated.

Consider deploying a comprehensive financial plan that accounts for projected healthcare costs and incorporates strategies such as increasing annual contributions to retirement accounts and diversifying investments to outpace inflation. Regularly reviewing your financial plan with a trusted advisor allows for adjustments based on evolving healthcare needs, policy changes, and cost fluctuations. By proactively planning for healthcare inflation, you can maintain your purchasing power and protect your savings from unforeseen medical expenses.

6. Explore employer-sponsored retiree health benefits

Many employers provide retiree health benefits that serve as a valuable supplement to Medicare. These benefits may cover services not included in Medicare, such as dental, vision, and prescription drug coverage, reducing retirees’ out-of-pocket expenses.

Employer-sponsored retiree health plans often have lower premiums and better coverage options than individual plans. If available, enrolling in these plans ensures comprehensive healthcare coverage while minimizing costs. Understand the eligibility requirements, coverage limits, and premium structures of these benefits. Taking advantage of employer-sponsored health benefits can significantly ease the financial burden of healthcare costs in retirement and help protect your hard-earned savings.

To conclude

Managing healthcare expenses in retirement is essential to maintaining financial stability and ensuring peace of mind during your golden years. Rising medical costs can pose significant challenges, but adopting the right strategies can safeguard your savings and help you manage these expenses effectively. You may consult with a qualified financial advisor to build a customized healthcare savings plan that can help safeguard your financial future.

Use the free advisor match tool to get matched with experienced financial advisors who can help create a personalized plan to protect your savings from rising medical costs during the golden years of your life. Answer a few simple questions and get matched with 2 to 3 vetted financial advisors based on your requirements.