How to Plan for Health Care Expenses in Retirement

Quick Answer

Health care expenses in retirement can take a big bite out of your nest egg. Knowing how to plan ahead is your best defense. That may include:

  • Contributing to an HSA
  • Increasing your savings rate
  • Taking advantage of an employer match
  • Considering long-term care insurance
  • Making catch-up retirement contributions
Happy doctor talking to senior male patient during a home visit.

When planning for retirement, it's easy to overlook just how expensive health care can be during this phase of life. Medicare doesn't cover everything. The Center for Retirement Research at Boston College estimates that the average 65-year-old household will spend about $310,000 on health care during the rest of their lives. Just over 20% of that—$67,000—represents out-of-pocket costs that aren't covered by insurance.

Whether you're decades away from retiring or getting ready to exit the workforce sooner rather than later, there are simple ways to prepare for health care costs when you're no longer working. Planning ahead could put you in a stronger financial position come retirement.

1. Consider a Health Savings Account

A health savings account (HSA) can be a great way to save money for future health care expenses. The money you put in is tax-deductible, which means that it reduces your taxable income while you're still working. Those funds can then be invested and grow tax-free. You can use HSA funds to cover qualified medical expenses—and you won't be taxed on these distributions. Copayments, deductibles and coinsurance all count as qualified expenses.

Your employer may offer an HSA. If not, you can open one yourself through a brokerage firm. To qualify, you'll need to be enrolled in a high deductible health plan. In 2023, that's a plan with:

  • A minimum deductible of $3,000 for family coverage ($1,500 for self-only coverage)
  • Annual out-of-pocket expenses that do not exceed $15,000 for family coverage ($7,500 for individual coverage)

HSAs have another perk: Once you turn 65, you can use those funds for whatever you want—not just health care expenses, though you'll be taxed on non-health-care distributions. In 2023, you can contribute up to $3,850 to an HSA for self-only coverage ($7,750 for family coverage).

2. Increase Your Retirement Savings Rate

When it comes to building your nest egg, saving early and often is key. The longer your money is invested in your retirement accounts, the more you'll benefit from compound interest. Your savings rate will depend on your financial situation, but the general rule of thumb is to save 15% in your 20s and 30s, then 20% in your 40s and beyond. Fidelity Investments also recommends the following benchmarks:

  • Age 30: Have the equivalent of your current annual salary saved
  • Age 40: Have three times your annual salary saved
  • Age 50: Have six times your annual salary saved
  • Age 60: Have eight times your annual salary saved
  • Age 67: Have 10 times your annual salary saved

If these numbers feel out of reach, start where you are and ratchet up your contributions whenever possible. Doing so can help you financially prepare for health care expenses in retirement. Consider the following ways to save more for retirement:

  • Increase your contribution amount by 1% to 2% every year
  • Put tax refunds and work bonuses into your retirement accounts
  • Pay off debt to free up more money for retirement
  • Buy a home (if it appreciates in value by the time you retire, you could sell it and pad your savings)
  • Pick up a side gig
  • Reevaluate your budget
  • Consider phased retirement, if even just for a few years

3. Take Advantage of an Employer Match

A 401(k) is an employer-sponsored retirement account. It's funded with pretax income, typically through automatic payroll deductions. That means contributions are taken right out of your paycheck. The money then grows on a tax-deferred basis, so you won't pay taxes until you take distributions in retirement.

Some companies offer an employer match. If yours does, they'll kick into your 401(k), too, either partially or on a dollar-for-dollar basis, up to a certain amount. Every employer is different, but understanding your options can help you save more for retirement. Employer contributions translate to free money.

The average employer match is 50%, up to 6% of an employee's pay, according to T. Rowe Price. Using that as an example, let's say your pretax salary is $60,000. You'd have to contribute $3,600 to get the full match. Your employer would throw in $1,800.

4. Look at Long-Term Care Insurance

If you or your partner experience a prolonged illness while retired, long-term care insurance can provide much-needed assistance. That can include help with things like bathing, eating and getting dressed. Some policies cover assisted living facilities, in-home care, hospice and more. Without insurance, these kinds of services could significantly deplete your savings. Here's a breakdown of monthly median prices in 2021, according to Genworth Financial:

  • Home health aide: $5,148
  • Assisted living facility: $4,500
  • Semi-private room at a nursing home facility: $7,908
  • Private room at a nursing home facility: $9,034

Those who are 65 years old today have an almost 70% chance of eventually needing some form of long-term care, according to the U.S. Department of Health and Human Services. Long-term care insurance premiums vary depending on your age, health, gender, amount of coverage and other factors. The American Association for Long-Term Care Insurance reports that the average annual premium for a 55-year-old couple ranges from $2,080 to $8,575.

5. Make Catch-Up Retirement Contributions

If you're getting closer to retirement, there are other ways to set aside more money for health care expenses. See if you can take advantage of catch-up contributions. Tax-advantaged retirement accounts have annual contribution limits. However, folks who are 50 or over are allowed to kick in more. In 2023, they can contribute an extra $7,500 to 401(k)s and $1,000 to individual retirement accounts (IRAs).

Catch-up contributions might make sense if you're behind on retirement savings. Just be sure your budget can easily absorb the higher contributions. On the upside, the extra money you put in is tax-deductible.

The Bottom Line

Health care expenses in retirement can take a big bite out of your nest egg. Knowing how to plan ahead is your best defense. That may include contributing to an HSA, increasing your savings rate, taking advantage of an employer match, considering long-term care insurance and making catch-up retirement contributions.

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