Strategies to Address Future Health Care Costs
How much money will you need to set aside to cover your out-of-pocket health care costs in retirement? Probably more than you think. According to a recent report by Fidelity Investments, 65-year-olds retiring in 2024 will pay, on average, about $165,000 for these expenses throughout their golden years. This figure is up 5% from 2023 and has more than doubled over the previous two decades. And you can expect costs to keep rising.
Naturally, individuals with serious health care issues will likely have to pay even more than the average. Plus, the Fidelity study doesn’t account for long-term care needs. In a worst-case scenario, these costs could drain your life’s savings!
What can you do about it? Don’t be reactive. Take a proactive approach in planning to cope with future health care costs, especially if you’re close to retirement. Here are six steps to consider.
1. Think Ahead
As part of your planning, work out a budget that incorporates estimated health care costs in retirement and other monthly living expenses. Typically, you (and your spouse, if married) will be covered by Medicare Parts A and B for most of the cost of medical visits and hospital stays. However, to pick up some slack, determine the costs of a prescription drug plan, such as Medicare Part D, and supplemental health insurance.
Also, in these uncertain times, continuing Medicare isn’t a guarantee through the end of your retirement years. Plan for the worst and hope for the best.
2. Investigate LTC Insurance
As mentioned above, an extended stay in a nursing home or similar facility can quickly dilute your savings. One option to protect yourself is to acquire long-term care (LTC) insurance.
The policy terms determine the benefit amounts you’ll receive daily or monthly up to a stated lifetime maximum or number of years. Benefits become available when you can no longer perform several basic activities of daily living — including bathing, dressing, eating, using the toilet, transferring and managing incontinence — or if you’re cognitively impaired.
Note that coverage may be affected by several factors. For example, you may not qualify for any coverage or lesser coverage due to a drug habit or a preexisting condition. Also, fewer insurers are offering LTC insurance as an option, and the number may continue to dwindle.
3. Maximize Contributions to Your 401(k) Account
What does your 401(k) plan have to do with health care? Possibly everything.
A 401(k) enables you to set aside money that grows tax-deferred until it’s withdrawn. When you reach age 59½, you can withdraw money penalty-free for any purpose, including health care costs. Of course, the distributions are taxable as ordinary income, but this can be a valuable resource if you experience unexpected health care expenses in retirement.
The more you can accumulate in your account, the better. The maximum deferral for a 401(k) in 2025 is $23,500 (up to $34,750 for specific older individuals). When you retire, you may roll over funds to a traditional IRA without any tax consequences. The same basic tax rules on distributions apply to IRA rollover accounts.
4. Opt for an HSA
A Health Savings Account (HSA), sometimes called the “medical IRA,” is a plan that works like an IRA and is used to pay for health care costs.
Generally, an HSA is funded by an employee in conjunction with a high-deductible health plan (HDHP) with specific dollar limits as adjusted annually by the IRS. The participant can’t be eligible for Medicare (they must be under age 65) or have other health insurance. The IRS also limits contributions subject to inflation indexing.
For 2025, an individual can contribute up to $4,300 for individual coverage and $8,550 for family coverage. In addition, a “catch-up contribution” of $1,000 is permitted for those ages 55 or over.
Note: Unlike a flexible spending account (FSA), there’s no limit or restriction on amounts carried over to pay future health care costs.
5. Reduce Out-of-Pocket Expenses
The flip side of saving enough money to cover health care costs is reducing your spending on health care. Here are a few “common sense” suggestions.
To reduce prescription drug costs, consider switching to generic medicines, finding less expensive alternatives or ordering through the mail. But don’t skimp on the meds you need.
Stay in shape physically and mentally by exercising regularly and eating right. Also, get the health screenings recommended for your age.
Map out plans for emergencies. You may save money by going to an urgent care center instead of the hospital. Similarly, you might request less expensive outpatient facilities for surgeries.
Choose in-network providers. Typically, this will result in lower costs when it’s feasible. However, that doesn’t mean you shouldn’t seek top-quality care.
Finally, ensure you have the optimal health care insurance coverage.
6. Set Up a Contingency Fund
You don’t need the blessing of the IRS to save money for health care expenses. Although no tax benefits are involved, you may create a dedicated contingency fund.
As you might expect, a fund consists of money set aside in a personal account to be used in case of emergency, such as an unexpected lengthy hospital stay or dental or retina surgery. Think of it as a safety net or a “rainy day” fund. You can create a separate fund for health care costs or lump all the money together to cover other things like car repairs, the loss of a job and so on.
It takes discipline to build up a sufficient cash reserve. But if a rainy day hits, you’ll be glad you did.
Practical Advice
It’s essential to put your plans in writing. You can rely on guidance from your professional advisors to help with the details.
Copyright 2025
This article appeared in Walz Group’s January 27, 2025 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.
