Improvements in medicine and a better understanding of physiology have helped extend the average life expectancy in the U.S., which is now close to 80 years. According to data from the World Bank, that's an increase of nearly a decade from just 50 years ago. But for U.S. residents, longer life also means having to manage steadily increasing health care bills. End-of-life health care costs can burden seniors as pricey medical procedures, equipment and medications start to become increasingly necessary.
Whether you're right on the edge of retirement or decades away from it, it's never too early to start considering your retirement and health care needs.
Medical care is rarely inexpensive, but health care costs for seniors are often particularly burdensome due to the ongoing needs seniors face. Long-term care, in particular, is a major factor leading to higher health care expenses for seniors versus younger individuals.
According to the 2017 Genworth Cost of Care Survey, the median per-month health costs for common long-term care can be high.
Some examples include:
- Home health aide services: $3,861 per month
- Adult day health care: $1,473 per month
- Assisted living: $3,628 per month
These costs do not include other common expenses such as medical procedures and medications. Seniors today will reportedly spend more than $400,000 in health care expenses during the course of their retirement years. Other figures show that the final five years of an individual's retirement can cost more than $217,000. And according to Merrill Lynch, women's health care expenses are on average 39% higher in retirement than men, which is partly due to longer average lifespans for women.
Unfortunately, many U.S. residents are unprepared to handle the unexpectedly high costs associated with aging. The median amount American families have saved for retirement is just $5,000. And, as of 2013, seniors reaching retirement age (56–61) had just $17,000 in retirement savings. Even with some recoveries in the stock market since that time, most individuals approaching retirement age simply won't have enough to cover the high costs associated with senior care.
Without taking the proper steps, many U.S. residents will face significant financial challenges upon retirement. In fact, seniors are increasingly forced to delay retirement for several years in order to afford health care costs.
It is never too late to prepare for the high cost of senior health care. Adults of any age should consider a variety of options for how they will pay for their post-retirement health care expenses, such as private health insurance, Medicare, health savings accounts and Social Security, among others.
Health Insurance and Medicare
Health insurance is the primary means through which U.S. residents pay for health care expenses. Most seniors can receive Medicare, which is the federally administered health insurance program designed to help cover medical costs for people ages 65 or over. However, like most health insurance plans, Medicare will not cover the entire cost of senior health care needs. In fact, the average out-of-pocket health care costs for seniors covered by Medicare was $7,620 in 2017.
Traditional Savings and Retirement Accounts
Although you should be using these methods to save for other expenses as well, a simple way to put away money for health care costs is through your retirement accounts, such as 401(k)s and IRAs. Those who are 50 and older and have both types of accounts can save up to $31,000 per year. The money grows tax-deferred, so you can accumulate a fairly large retirement savings by maxing out these accounts.
Long-Term Care Insurance
A key coverage for those entering retirement age is long-term care insurance. This is designed to cover long-term care costs, which is often one of the largest expenses for seniors who are ill. Although its high price tag is often criticized, there are numerous affordable long-term care plans for seniors to consider. For example, some insurance providers may combine long-term care and life insurance together, creating a holistic end-of-life insurance option.
Health Savings Accounts
Health savings accounts are designed to work alongside high-deductible health insurance plans. More commonly known as HSAs, these are high-yield accounts that consumers can use to help pay for medical expenses not covered by health insurance.
The benefit of HSAs is that withdrawn funds are not taxed so long as they are used for medical or health care expenses, including dental and vision. The only part of an HSA that is taxed is the accrued interest, which is tax-deferred, much like a 401(k). However, there are some limitations to HSAs. For example, the amount you can contribute per year is low, and there are some restrictions on who will qualify.
There are a few other variations on health savings accounts, including Archer medical savings accounts (Archer MSAs), flexible spending arrangements (FSAs) and health reimbursement arrangements (HRAs).
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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