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Keep up with rising health care costs in retirement

For most of us, aging means that medical problems are likely to become a common concern. As a result, health care can become a major expense in retirement. Medicare generally serves as the basis for your health insurance later in life, starting at age 65. If you retire before age 65, you will find that insurance coverage is very expensive, with potentially high out-of-pocket costs.

An important category of expenses during retirement

For most people, health care expenses increase as they age. According to statistics compiled by the Kaiser Family Foundation, the average annual health spending for an average woman is $ 11,694 for people 65 and older. This compares with an average annual spending of $ 8,343 for people 55-64 and $ 5,775 for women in the 45-54 age group. Spending patterns are similar when costs are compared for these different age groups among men.

At the same time, changes in health care costs tend to exceed the standard rate of inflation. According to the U.S. Bureau of Labor Statistics, during the 15-year period ending in 2019, the cost of living for all goods and services increased by 2% annually. During the same period, the costs of medical services increased at an average rate of 3.5% per year. Rapidly rising health care costs can quickly eat away at your retirement savings as you age.

A challenge even with Medicare

The truth is, while Medicare helps make health insurance affordable for older Americans, it is far from free. You pay your Medicare Part B premiums (doctor visits and other care services). In 2020, the base premium for Medicare Part B was $ 144.60 per month per person, but it may be higher depending on your income level. Generally, insurance premiums increase every year. If you choose Medicare Part D (prescription drug coverage), there is an additional bonus, but it must be offset by lower drug costs. You can also choose to buy the Medicare supplement insurance plan, which can add hundreds of dollars to your monthly budget but limit other out-of-pocket expenses.

Steps to take before you retire

Good planning can help you prepare for the challenges of medical costs in retirement. Possible steps to address this issue include the following:

  • Review your current savings strategy to make sure you set aside enough money to cover all of your retirement expenses.
  • Enroll in a health insurance plan that includes a Health Savings Account (HSA). The money saved in the account can increase based on tax benefits, and the dollars you don't use today can be used to cover health care expenses when you retire.
  • Set aside a portion of your savings to specifically pay for medical costs in retirement, including insurance premiums and personal expenses. This helps you avoid overspending in other areas and jeopardizing future health coverage.
  • Consider exploring long-term care insurance to determine if it makes sense in your situation.

Be sure to consult with your financial advisor to learn more about the potential financial challenges you face with retirement healthcare and to explore the steps you need to take today.