Research shows that baby boomers are falling behind on both retirement planning and saving. In fact, Time.com reported that roughly 74% of Americans are behind on their retirement savings.
Saving for retirement goes way beyond rent, utilities, and travel. Just because a national program such as Medicare exists to help with medical expenses in retirement doesn’t mean that baby boomer shouldn’t save for healthcare costs in retirement.
One of the biggest mistakes in planning for retirement is failing to save for healthcare costs. Let’s look at why.
Medicare is Expensive
When you finally get to that point in your life when you are ready to start planning for retirement, you should prioritize how much you save based off what you will need. Just because you are healthy today, doesn’t mean that you will be healthy when you are in retirement.
Many baby boomers don’t prioritize saving for healthcare costs because they often think that the two original parts of Medicare will cover everything and that Medicare is free. Whatever you do, don’t believe it! It is far from the truth.
What many people don’t realize is that the taxes that are deducted from the earnings we make only pay for Medicare Part A hospital expenses in your retirement years. Those taxes contribute nothing toward your future outpatient or drug coverage.
CNBC reported the findings of a study in which it was learned that about half of the people surveyed were completely unaware that Medicare Part B outpatient covered isn’t free to them at all.
When you retire and enroll in Medicare, it’s crucial that you know that you’ll still have to pay monthly premiums for both Parts B and D in addition to copays, coinsurance, and deductibles. The premiums for Part B will be deducted from your Social Security income checks and if you enroll in Part D, you will pay monthly premiums for that, too.
This lack of preparedness for the eventual day when you will be living on a fixed income can put you in a world of hurt and financial worry in the future.
The Possibility of Long-term Care
Speaking of medical expenses in retirement, another error commonly made is failing to put away significant savings for long-term care benefits in your elder years.
The costs for long-term care are staggering. A study conducted by Carescout in 2018 found that annual costs for a home health aide or rent in an assisted living facility can be around $50K per year. If you live in a nursing home, you can expect to spend double that.
One piece of recent good news is that Medicare is now allowing Part C Medicare Advantage plans to include some benefits that are related to long-term care. Insurance companies offering these plans can now build in benefits for things like home safety modifications to help you stay in your own home longer. They can also offer to support services from care workers in your home, adult day care services and even help with traveling to and from your doctor appointments.
We can expect to soon see more existing Part C plans start to offer some of these benefits. However, these potential benefits, while helpful, will not pay for the kind of long-term care costs you may experience if and when you need help with activities of daily living and need to move into assisted living or nursing home care. It’s critical that you set aside some retirement funds for this in case you ever need it.
How to Prepare
There are many ways to save during your working years, including in a 401k or IRA and every dollar you put away for your future is great. However, there is one kind of savings vehicle that is especially helpful for future medical costs. It’s called a health savings account.
To open up an HSA, you must first enroll in a qualifying health plan with a high deductible. This makes you eligible to set up a health savings account and contribute money into it monthly or yearly up to a certain limit set by the IRS.
The money you contribute into the account over the years is a top of the line deduction on your taxes so it will reduce the money you pay to the federal government in the first place. Then the money earns interest over time and compounds and continues to grow.
You can use these funds for ordinary medical expenses like doctor and prescription copays, deductibles and even for ancillary services like dental and vision expenses. Later when you retire you can also use the funds for things like your Medicare Part B premiums and long-term care expenses.
Being prepared for retirement takes commitment, but you don’t have to go it alone. Visit with a financial advisor and estimate your future expenses for everything from healthcare to groceries and utilities. Having a goal makes things real and it will help you to stay on track with your savings.