Retirement and health care are intricately linked, though Americans often don’t think of them in the same context.
And just as many people are behind in accumulating the money needed to pay for a comfortable retirement, plenty are falling short in estimating and preparing for out-of-pocket health-related expenses.
Here are a few things to note about health expenses in retirement:
1. You might need more than a quarter-million dollars
A couple retiring today at age 65 likely could need about $280,000 to pay for health and medical expenses throughout retirement, according to the latest annual estimate by Fidelity Investments. That’s a big number, yet it doesn’t include all the potential health expenses retirees might face.
What the $280,000 estimate does include are out-of-pocket drug expenses, Medicare deductibles and coinsurance expenses. It doesn’t include over-the-counter medications, most dental services and long-term care.
The estimate is up 2 percent from last year’s study of roughly $275,000. The estimate further assumes people qualify for Medicare but don’t have employer-provided health coverage in retirement.
Health costs in retirement can be difficult to plan for. Nearly half the respondents in a Fidelity survey estimated that non-reimbursed health expenses throughout retirement would total $100,000 or less, while another one-third said they had no idea.
“People in general don’t have a good understanding of what health care will cost in retirement,” said Hope Manion, a senior vice president at Fidelity. “The message here is to save as much as you can, in any way you can.”
2. The estimate isn’t as bad as it seems
A cost estimate of $280,000 is pretty scary. The good news is that this figure would cover two people. So if you’re among the growing ranks of retirees who are single, your outlay would be around half that — an estimated $133,000 for men and $147,000 for women (who live longer and thus could face higher expenses).
Also, the estimated costs would be spread over roughly two decades, as a typical man retiring at 65 can be expected to live to age 87, while the remaining life expectancy for women is to age 89, Manion said.
In addition, much if not most of that money wouldn’t be needed in the early years or retirement, as the biggest health expenditures typically come in the last several years of life. That means you could keep your savings or investment growing for at least several years before tapping into it significantly.
Fidelity’s estimate assumes Medicare, which is facing financial pressures, will remain in force over the expected lifespans of people now in their mid-60s.
3. Tax strategies can help, especially this year
Many health-care costs, whether incurred in retirement or not, remain deductible, even after tax reform. Yet medical expenses typically are difficult to deduct, subject as they are to a limitation.
Besides, fewer taxpayers will choose to itemize medical or other deductions, as tax reform nearly doubled the standard deduction, making that the more advantageous strategy in many cases.
That’s where bunching comes in. Bunching essentially involves doubling up on certain deductible expenses in one year and skipping them the next. It can be used with various deductions where the amount and timing of spending are flexible.
Charitable donations are an obvious example, but so too are medical costs, assuming you have large outlays and can either delay or accelerate certain treatments, surgeries, doctor visits and so on.
In 2018, medical expenses can be deducted to the extent they exceed 7.5 percent of a person’s income, but that rises to 10 percent starting in 2019, making it harder to deduct anything.
If you bunch more medical expenses by incurring them this year, it might be enough to put you over that 7.5-percent threshold and give you enough overall deductions to make itemizing worthwhile.
4. Health is one of five key retirement risks
High and unanticipated health-care expenses are one of five key risks facing retirees, according to a new report by the Vanguard Group.
The others are investment risks due to volatile financial markets, longevity risk (the danger of living so long that you outlive your savings), event risk (which can be a number of hazards such as big housing repairs) and tax/policy risk (the threat of adverse changes to income-tax rules and those affecting pensions, public health benefits and so on).
Health risk largely focuses around large or unexpected out-of-pocket expenses for both insurance premiums and expenses not covered by insurance, according to the Vanguard report.
Insurance, whether government provided or private, is the most effective way to deal with health risks, according to Vanguard, but retirees might also need to rely on a combination of personal savings, pensions, housing equity and work.
5. Medicare’s financial problems to worsen
Medicare, the federal insurance program that pays for a substantial amount of retiree-health costs, faces a worsening financial outlook owing to the aging population and other factors.
The program’s trustees want Congress to adopt remedies sooner rather than later, yet reforms don’t appear to be in the immediate future.
Robert Moffit, a senior health fellow at the conservative Heritage Foundation, sees little likelihood that Congress will reform Medicare this year. In part, he said, that’s because House Speaker Paul Ryan, a champion of reform, is stepping down.
Also, President Trump has vowed not to touch the program this year. Medicare reform is a thorny problem even when the political tailwinds are favorable.
Meanwhile, Medicare has become the fastest component of entitlement spending and will need to be addressed eventually, Moffit added.
“The decision to do nothing is a choice, and choices have consequences,” he said.
Medicare’s main hospital trust fund is expected to be depleted by 2029, at which time general revenue, payroll taxes and other funds will be able to meet only around 88 percent of expected spending, according to the latest report of the trustees of the Social Security and Medicare programs.
The trustees are calling on Congress to take action sooner rather than later so that lawmakers can consider a broader range of remedies and so that the public will have more time to adjust.
Bottom line: Given Medicare’s funding uncertainty, it will be prudent to have money on the side to pay health-related expenses in retirement, including those not covered by the program.
Russ Wiles, Gannett