Healthcare costs make up a large portion of most retirees’ living expenses. According to Fidelity’s latest estimate, someone who retires at 65 in the U.S. in 2023 will need about $157,500 saved to cover their out-of-pocket healthcare expenses in retirement. Fidelity also estimates that the average retired couple will need about $315,000 saved for healthcare.
Many people don’t have this much money set aside in their budget specifically for healthcare expenses. If you’re in this category, or if you simply want to make healthcare more affordable and predictable when you retire, here are five strategies you could consider.
1. Use a health savings account (HSA)
The most obvious way to prepare for healthcare costs is to save more money, specifically in tax-advantaged retirement accounts. But the best place to save for healthcare costs is a type of account known as a health savings account, or HSA. Far too few people take advantage of these excellent accounts.
To be eligible for an HSA, you need to have a qualifying high-deductible healthcare plan. But if you qualify, and contribute, there are a few key advantages.
Most importantly, HSAs get a rare triple tax benefit. Money you contribute is tax deductible. Your contributions can be invested, like in a 401(k), and your investment profits are tax deferred. Finally, any money you use for qualifying healthcare expenses can be withdrawn completely tax free.
Unlike flexible spending accounts, or FSAs, money in an HSA does not need to be used by a certain deadline — you can let it roll over and continue to grow indefinitely. And if you don’t end up needing it all to cover healthcare costs, you are free to use your HSA as a general retirement account after you turn 65.
2. Retire in a lower-cost state
Not only do overall costs of living for retirees vary by state — healthcare costs do too. According to the latest data from the Centers for Medicare and Medicaid Services (CMS), the average person (of all ages) spends a total of $10,191 on healthcare expenses. This ranges from a low of $7,522 in Utah to a high of $14,381 in Washington D.C.
Of course, there is more that should factor into your decision of where to retire than healthcare costs. But as you’re planning, it’s important to keep in mind that where you live can make a big difference.
3. Postpone retirement until 65 (or longer)
The clear benefit of waiting until age 65 to retire is that you’ll be eligible for Medicare. Unless you have employer-provided healthcare coverage you can continue to use if you retire early (not common), this move can make a big difference.
In addition to Medicare eligibility, your Social Security benefit can be much higher if you wait to retire. Americans can claim Social Security at any point between the ages of 62 and 70, but the longer you wait, the more inflation-protected income you’ll have.
4. Medicare supplement insurance
Medicare supplement insurance plans (also commonly known as Medigap plans) won’t necessarily reduce your healthcare costs, but can make them more predictable. There’s a lot to unpack about Medicare supplement insurance plans, but the general idea is that they can cover out-of-pocket costs that Medicare parts A and B don’t pay for. Medicare’s website has an excellent primer on these plans, and what the various choices cover.
5. Stay active
It’s a fact that people who are active throughout their lives not only tend to live longer than those who aren’t, but they have significantly lower healthcare costs, on average. There are numerous studies that confirm this, but one study published in BMJ Open Sport and Exercise Medicine found that healthcare costs were $1,874 lower per year after age 65 for people who increased their level of physical activity in early adulthood.
All groups who either maintained or increased physical activity at any stage of life had lower healthcare expenses in retirement than those who were consistently inactive from adolescence into middle age.
The bottom line
Healthcare in retirement can be expensive, but smart planning ahead of time can make a big difference. By incorporating these strategies into your retirement planning, you can not only potentially reduce your healthcare costs, but can make sure you’re ready for whatever they may be.
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