Factor in healthcare costs when planning your retirement


As we grow older, the list of potential health concerns can add up, as does the cost to treat those conditions.

According to the Employee Benefits Research Institute, a 65-year-old couple retiring today should put aside $392,000 to help cover healthcare costs.1

Katy Votava, a registered nurse and health economist, shares her insights on how retirees and those nearing retirement can better plan for those costs. Her company, Goodcare.com, trains financial advisors and their clients about health care costs. According to Votava, smart planning early on is critical because the actions you take now can make a big impact on how much you’ll pay later.

Here are Votava’s main takeaways.

Don’t focus on one big number

Future healthcare costs may seem daunting, but they’re an expense that will stretch out over a longer period of time. “You don’t need that chunk of money all on one day,” Votava says. “It’s part of your retirement cash flow because it’s part of your retirement expenses. We don’t talk about any other retirement expense that way. So think about your annual expense. That’s something you can wrap your head around more easily.”

Staying healthy cuts down on costs

Chronic health conditions will increase your health spending. For example, people with diabetes could spend twice the amount on health care each year than people who don’t have the condition.2 While chronic issues may not be avoidable, preemptive screenings and active management could help mitigate the effects.

“Being healthy can pay you back dividends many times over. First of all, you’re going to enjoy your retirement more, and that’s priceless,” Votava says. ”If you’re healthy, your overall costs will be lower year-to-year. And if you become ill, your chance of getting better is going to be better.”

Explore health savings accounts

Votava calls herself “a big fan” of health savings accounts (HSAs), which can be paired with a high-deductible health insurance plan. Employees or their company can deposit tax-free money into the account to cover any health-related out-of-pocket expenses. The money grows tax-free, and it can be withdrawn tax-free when it’s used for health care.

“Some people who are closer to retirement may pay for their health expenses from money elsewhere to let their account balances grow with the tax deferral. Then they have a tax-advantaged account for retirement health care,” Votava adds.

Some companies also offer a Flexible Spending Account (FSA), which allows employees to use pre-tax dollars for out-of-pocket expenses with any health insurance plan. Unlike an HSA, however, these contributions do not roll over and must be used within the calendar year.

Medicare is just the start

While Medicare provides some coverage for healthcare, it doesn’t cover everything. For example, only 80 percent of doctor’s visit costs are covered. Researching the various types of supplemental plans that are available will help you plan for any gaps in coverage.

Long-term care planning can help transfer your risk

“Long-term care is a classic risk question. How willing are you to take the risk that you’ll need long-term care? If you self-insure, you have to determine if that’s a good use of your money. If you decide to offload that risk, will you have another source of revenue to cover that?” Votava says

Of course, speak with a financial advisor to learn how you can factor healthcare into your retirement plan.

1Frostin, Paul et al. “Amount of Savings Needed for Health Expenses for People Eligible for Medicare: Unlike the Last Few Years, the News is Not Good.” Employee Benefit Research Institute. Vol. 36, No. 10. October 2015.https://www.ebri.org/pdf/notespdf/EBRI_Notes_10_Oct15_HlthSvgs_DB-DC.pdf 
2Zhuo, Xiaohui et al. “The Lifetime Cost of Diabetes and Its Implications for Diabetes Prevention.” American Diabetes Association. September 2014. http://care.diabetesjournals.org/content/37/9/2557 

Katy Votava and her company, Goodcare, are not affiliated with Lincoln Financial Group.

Lincoln Financial Group® affiliates, their distributors, and their respective employees, representatives and insurance agents do not provide tax, accounting or legal advice. Please consult an independent advisor as to any tax, accounting or legal statements made herein.

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