Insurance in Retirement

Plan for retirement's healthcare maze

Your health insurance needs, and how you tackle them, are liable to change upon retirement. Most notably, you may no longer be covered by your employer’s plan. Even if you keep your company plan, you’ll also be eligible (if you aren’t already) for Medicare once you are 65 years old. 

It is critical that you have a healthcare blueprint for your retirement years. Know what Medicare pays for (and what it doesn’t), what other medical coverage may be available, and how you plan to fund any other medical expenses you may incur. 

You do not want to be caught without adequate coverage, both for obvious health reasons and because it may result in financial hardship.

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How big will the insurance tab be?

Healthcare is one of the biggest costs in retirement and is critical to plan for, despite how difficult those expenses may be to estimate.

For scale, consider this 2016 estimate from Fidelity[1]: a 65-year-old couple will average out-of-pocket medical costs of more than $250,000 over 20 years, and potentially face an additional $130,000 to insure against long-term care expenses.

Experts expect medical costs to continue to increase over time, rising by over 5% annually through 2022. These expenses will likely reach a sizeable overall dollar amount, as well as consume a significant portion of your retirement budget. 

Alas, it is difficult to accurately predict the exact amount needed for future medical expenses. The costs themselves are unpredictable and hard to estimate. 

Therefore, it is important to recognize some of the main drivers of total healthcare costs. Knowing what the costs are dependent on may help to minimize surprises and manage expenses, when possible.

Longevity is the biggest driver of total healthcare costs. Healthy retirees tend to end up with higher lifetime costs. Medical expenses are also influenced by your health history, location, and tendency to use healthcare, among other things.

A few ways you can try to mitigate your healthcare expenses are by making healthier lifestyle choices, shopping around yearly for the right insurance plan, and considering the timing of Medicare enrollment.

Medicare should be the first line of defense tackling healthcare bills, although you will likely still incur some out-of-pocket charges. Health savings accounts may also be a useful tool to save today, and to help plan for future medical expenses. 

Also, keep in mind that these expenses will be incremental over time (more manageable than a giant lump sum). The earlier you start planning for them, the better!

Here is a cost calculator from AARP that may be helpful:

When should I worry about this?

Deciding when to retire and/or start receiving benefits is a personal decision. It depends on current and projected future cash needs, your health, family longevity, and whether you have other sources of income in retirement beyond Social Security. And, don’t forget that if you’re married, you have two lives to plan for.

That said, the earlier you think about planning for retirement, the better off you’ll be. You will have more time to save and you’ll have more flexibility to adapt to changing preferences, as well as to external factors. Of course, retirement may be longer than anticipated, but the sooner you plot out and act on your retirement blueprint, the easier these unexpected twists will be to handle.

Remember that you have choices. You can keep working. Your monthly retirement benefits will look different if you delay receiving them. For instance, monthly income benefits are typically higher, as they are spread over fewer retirement years. At the same time, the few extra years of working should give you a larger savings pot that can more easily cover monthly expenses.

Weigh these factors carefully. These decisions will affect your financial situation for the rest of your life. Meet with a professional for help navigating this maze.



[1], Health Care Costs for Couples in Retirement Rise to an Estimated $260,000, Fidelity Analysis Shows, 08/16/2016