It’s the week of Thanksgiving. You’ve done your Turkey Day shopping (whew those stores were packed this weekend, right?!).
Now what’s left is prepping for the big food extravaganza. Are you the Martha Stewart type: chopping the mirepoix for the stuffing and pickling the vegetables for the relish tray already? Or are you the take the turkey out of the freezer the night before and run it under hot water to thaw it out in time kind of person?
Well, we can’t all be Martha Stewart but I’ve done enough Turkey Days to know you don’t want to leave the thawing the bird step to the last minute. You gotta plan for that. And it’s all a timing game for what goes in the oven when. And if multiple things will fit. And if everything will actually get cooked by the time you said you’d sit around the dinner table with your New York/New Jersey Metro family and friends.
Saving for retirement healthcare costs is a bit like that (yes… I did just make that *slightly* awkward segway). Which I want to talk about today.
But before I do, let me also remind you that re-enrollment season is here if you’ve got healthcare.gov insurance. The deadline for re-enrollment is December 15.
It’s unfortunate, but thanks to rising healthcare costs and a still-inflated economy, note that many premiums are going up — AGAIN. Don’t forget to make adjustments for that in your budget.
And let’s make adjustments tax-wise with healthcare and retirement costs to make your 2024 taxes more optimized. There’s still time to talk about those moves, but not a lot, so get on my calendar soon:
And now, for the nitty-gritty of healthcare costs in retirement. There’s a lot in here, but hang in there. And keep this starred to go back to when you have questions.
Healthcare Costs in Retirement New York/New Jersey Metro People Probably Haven’t Thought Of
“If you do what is easy your life will be hard. But if you do what is hard, your life will be easy.” –Les Brown
Think you’ve got a good idea of how much money you’ll need to cover healthcare costs in retirement? I’m sorry to say that research says you probably don’t.
According to Fidelity Investments, most retirees underestimate how much they’ll need to cover healthcare costs during retirement by 50 percent – estimating a modest 75k, when in reality, they’ll need to be prepared to put up around 165k (after-tax savings).
If this sum is surprising to you, you’re obviously not alone. But, don’t be discouraged. What if you could minimize those healthcare costs and boost your financial well-being in retirement?
Let’s explore this more, whether you’re far from retiring or already years in.
First, let’s see what those extra healthcare costs in retirement are that make the estimation gap so large.
Long-term care. If you need help with daily activities at home or in a nursing facility, that has to come straight from your pocket (unless of course, you have long-term care insurance or qualify for Medicaid).
Dental, vision, and hearing care. Medicare also won’t help you out with routine dental care, eyeglasses, hearing aids, and similar medical services.
Medicare premiums. The monthly premium for Medicare Part B, which covers outpatient care, is about 174.70 dollars per month for 2024. But it could be higher if your income exceeds certain thresholds due to your Income-Related Monthly Adjustment Amount (IRMAA). On top of that, there’s Part D for prescription drugs, and that cost will depend on the plan you choose.
Medicare gaps. Medigap plans are needed for copayments, coinsurance, and deductibles that Medicare doesn’t fully cover. But these plans can add hundreds of dollars a month to your healthcare costs.
Healthcare inflation. General inflation usually increases by 2-3 percent annually, while healthcare costs have historically risen closer to 5-6 percent per year. For you, that means the 5k you budgeted for medical expenses today could easily need to be 10k or more in 15-20 years.
Yikes. So what do you do about these extra costs? Let’s keep going…
Next, determine the best plan to combat the unexpected costs. This depends on your age, and whether or not you’ve exited the workforce yet.
If you’re about to retire soon, you should put your savings efforts into catch-up contributions – in 2024, you can contribute an extra 7.5k to a 401(k) and an extra 1k to an IRA.
And if you’re not already using a Health Savings Account (HSA), now is the time to get started (assuming your employer offers it and you are already enrolled in a high-deductible health plan). With an HSA, contributions, growth, and withdrawals for qualified medical expenses are all tax-free.
You might also consider delaying your retirement. Now, I understand the itch to leave the workforce – but working a few more years allows more time to save, and delays your withdrawals from your retirement accounts. Plus, waiting on Social Security benefits past your full retirement age can increase your monthly payout by up to 8 percent per year until age 70.
If you’re 65 and retiring, you’ll want to focus on choosing the right Medicare option. On top of the individual Parts A, B, and D, you can choose between Original Medicare (Parts A and B, plus optional Part D and Medigap) or a Medicare Advantage Plan (an all-in-one alternative). Alphabet soup, right?
You’ll also need to compare Medicare Advantage plans with Medigap, which come with their own pros and cons. The pros of Medicare Advantage plans: lower upfront costs, and included extras like dental, vision, and hearing. But on the negative side, they can have higher out-of-pocket maximums.
The advantage of Medigap policies (also called supplemental insurance) is that they fill gaps in Original Medicare coverage (like copays and deductibles). However, they come with higher monthly premiums.
If you’re 65 and still working, you’ll want to compare Medicare plans with the health insurance your employer offers (which will look different for everyone, depending on your income, current coverage, and health needs).
If your employer provides health insurance and your company has 20 or more employees, your employer’s plan should likely be your primary coverage – in which case, you may not need to enroll in Medicare Part B quite yet. But, if your employer coverage is expensive or doesn’t meet your needs, Medicare might be the better option.
Also, a quick note to consider: If you’re contributing to an HSA, enrolling in any part of Medicare will disqualify you from making further contributions.
As the trustworthy Brooklyn tax pro in your corner, I want to encourage you – it’s okay if healthcare costs in retirement are more complicated (and more expensive) than you expected. What you need to focus on is making the best choices you can going forward to help boost your savings and mitigate some unnecessary costs. It is possible, and we are here for you with the tax side of it all.
To your retirement prosperity,
Lillian Turner-Bowman