How Expensive Can Your Healthcare Get After Retirement?

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Health and old age seem to have come up a lot in conversation recently. The common consensus amongst my friends and family is that it's terrifying. Even people who are optimistic about their retirement worry about the costs of healthcare, particularly long-term care.

This fits with research by RBC Wealth Management, which shows that 80% of Americans are concerned about how they'll pay healthcare expenses when they retire. The data also shows that we significantly underestimate how much healthcare will cost.

RBC's survey showed people expected to spend about $2,700 a year on out-of-pocket healthcare. But the Bureau of Labor Statistics puts that figure closer to $6,500 per person.

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The good news is that there are steps we can take to make those costs more manageable.

Your healthcare costs will likely be higher than you think

It is difficult to estimate healthcare costs. Family history can give us some ideas, but it's still hard to know how long we might live or what types of treatments and care we might need. Based on RBC's research, it's safe to say it will probably cost more than you think, not least because the cost of health insurance continues to rise.

One way to reduce costs is to bundle your health insurance with other coverage, such as life insurance. According to the Kaiser Family Foundation (KFF), average family health insurance premiums have risen 43% since 2013.

Deductibles and copays are also rising. Expensive technological advances have magnified higher living costs. On top of this, drugs and equipment are getting more expensive, and larger numbers of people need more care.

The RBC report says an average 65-year-old couple who retired in 2022 can expect to spend over $680,000 in future healthcare costs. That's a significant chunk of many Americans' retirement nest eggs.

Medicare makes a big difference, but it won't cover everything. RBC says Medicare will cover less than two-thirds of your healthcare expenses in retirement. It's important to plan for additional insurance coverage to pay for things like eye care, dental costs, and hearing aids.

The report authors say you could assume you'd spend about 15% of your budget on health if you retired today. That would probably rise to about 40% of your total costs in the following 20 years.

Take steps to fund your healthcare needs

If you're struggling to balance your finances today, the idea of coming up with hundreds of thousands of extra dollars for your autumn years may seem overwhelming. Try not to give up. Even small contributions today can add up -- and the earlier you start, the longer compound interest has to work in your favor.

Start by making sure you're contributing to tax-advantaged retirement accounts, such as 401(k)s and individual retirement accounts (IRAs) . If your company has a 401(k) plan, find out if it will match your contributions and what you need to do to invest. In addition to the tax advantages, that employer match is money you wouldn't otherwise have.

If a 401(k) isn't an option, learn about the different types of IRAs to find the right one for you. A traditional IRA can reduce your tax bill today, while a Roth IRA lets you contribute post-tax dollars and make tax-free withdrawals in retirement. The name of the game here is maximizing your annual tax-advantaged contributions for as many years as possible.

Go beyond IRAs and 401(k)s

IRAs and 401(k)s are important. But there's another lesser-known tax-advantaged account that can turbocharge your health fund: a health savings account (HSA).

If you have a high-deductible healthcare plan, a health savings account could deliver even more tax perks than an IRA. Many people call it the triple tax advantage:

• Your contributions are tax-deductible , which lowers your taxable income.
• Your investments grow tax-deferred, so if your investments do well, you won't pay tax on the gains.
• You can make tax-free withdrawals if the money goes toward medical costs.

HSAs aren't a cure-all for all your financial healthcare worries. Like other tax-advantaged accounts, there are limits on how much you can contribute. Plus, some employers don't offer them. If that's the case, or you're self-employed, it's possible to open one on your own. You'll also need to find the cash to put into your HSA.

Even so, they are pretty powerful. Analysis from Vanguard looked at the wealth-building efforts of a hypothetical 40-year-old. By the time the saver reached 65, Vanguard's model showed the HSA saver had $91,000 more than they'd have without one. There are lots of ifs and buts built into these models, but that's still a good portion of the money you may need.

Don't ignore your healthcare needs

If you're worried about paying for your healthcare later in life, try to make a realistic estimate of what your costs may be. Once you have a rough target, you can plan how you might get there. There is no single easy answer.

Look into long-term care insurance and Medigap plans. Try to maximize your contributions to tax-advantaged accounts like IRAs, 401(k)s, and particularly HSAs. Over time, the combination of tax breaks and compound interest will help you build a sizable fund for healthcare and retirement.

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