Healthcare Costs Risk

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Healthcare Costs Risk

Healthcare costs risk is the risk that you will face unmanageable out-of-pocket health care costs in retirement. This is undoubtedly among the greatest of many people’s fears in retirement planning.

The reality of it

Precisely because folks are now healthier and spend longer in retirement than ever before, this risk has increased greatly in recent decades. The medical advances and new drugs that improve and extend our lives come at a hefty price that now must be paid over a greater expected period of time.

The likelihood of significant out-of-pocket healthcare costs obviously depends on the state of your current and future health, and whether the cost of your care is covered by some form of insurance. It is unrealistic, of course, to count on perfect health for the rest of your life, which means that all but the wealthiest among us need insurance to provide enough coverage to at least reduce out-of-pocket expenses to a manageable level.

However, if you have employer-sponsored healthcare insurance now, keep in mind that your current coverage is not necessarily guaranteed in retirement. Many employers—in both the public and private sector—are scaling back on skyrocketing retiree healthcare benefits. This trend is likely to continue, so that uncovered healthcare costs could increase dramatically in the future.

Most of us plan to rely on Medicare, which is provided to most US citizens at age 65 and covers many healthcare costs. These costs can represent a large portion of your healthcare bill, particularly if you have one or more chronic conditions.

Don’t count on Medicare for everything

By no means will Medicare cover all your medical bills, however. For starters, vision, hearing and dental care are not covered. There are significant gaps in coverage, as well as co-pays. Medicare supplement insurance ("Medigap") is available to help with these costs, but the insurance itself can be expensive. Moreover, given the uncertain economic environment, Medicare may face fundamental changes in the future that would almost surely reduce the scope and amount of coverage.

Managing healthcare costs risk

Healthcare costs can be managed in many different ways, including the obvious—stay healthy by sticking to a sensible lifestyle. Beyond that, you should budget for annual increases in both insurance costs and out of pocket expenses.

A good way to prepare for those expenses is to open a health savings account (HSA). An HSA allows individuals covered only by high-deductible health plans to receive tax-preferred treatment of money saved for medical expenses. These accounts are designed to pay current medical expenses and to build savings to pay for future medical expenses. You can claim a tax deduction for contributions you make, and the income earned on the account is tax-free. Distributions are federal income tax-free and, in most states, state income tax-free if you pay qualified medical expenses, but are taxable if used for other purposes. The unused balance in your HSA carries over from year to year and can be withdrawn, subject to ordinary tax, without penalty when you turn 65. Keep in mind that you cannot contribute to an HSA when you become entitled to Medicare.