Healthcare costs risk is the risk that you will face unmanageable out-of-pocket healthcare costs in retirement. This is undoubtedly among the greatest of many people's fears in retirement planning.
The reality of it
Precisely because people 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 your life 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 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, though, to count on perfect health for the rest of your life, which means that all but the wealthiest among us will need insurance to provide enough coverage to at least reduce out-of-pocket expenses to a manageable level.
If you have employer-sponsored healthcare insurance now, keep in mind that your current coverage is not necessarily guaranteed in retirement. Most plan to rely on Medicare, which is provided to all 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
Medicare will not cover all your medical bills. For starters, vision, hearing and dental care are not covered. There are significant gaps in coverage, as well as co-pays. Medicare supplemental insurance ("Medigap") is available to help with these costs, but the insurance itself is expensive. Moreover, given the uncertain economic environment, Medicare may face fundamental changes in the future that may reduce the scope and amount of your coverage.
Managing healthcare cost 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.
Health Savings Accounts
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 interest earned on the account is tax-free. Distributions may be 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, when you turn 65.
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