From 1920 to 2020, the U.S. population of adults 65 and older grew almost five times faster than the total population. As of the 2020 census, this group had reached 55.8 million, representing 16.8% of the U.S. population. With the increasing number of adults in the United States aged 65 and older, it’s worrisome that their overall financial health literacy remains relatively low. This raises concern about a large percentage of the population being unable to handle consistently rising healthcare costs during retirement in the coming years.

Did you know that, on average, half of the money we spend on healthcare is allocated to expenses during retirement? Unfortunately, many people overlook and neglect to prepare for the costs that arise during the latter stages of their lives. It’s crucial to recognize the importance of creating a personalized financial security plan to address the ever-rising retirement healthcare costs.

It starts with knowing the facts and using the information at your disposal to pave a better path forward. A 2012 study titled “The Impact of Health and Financial Literacy on Decision Making in Community-Based Older Adults” found that those within the over-65 age group demonstrate lower levels of financial health literacy than younger demographics. Further, it found a noticeable link between higher financial health literacy levels and the ability to make beneficial decisions about managing healthcare costs. A more recent 2022 study demonstrates that financial literacy plays a role in protecting against the loss of financial resilience and promoting a good quality of life for middle-aged and older adults. 

Healthcare Costs in Retirement Are Significant and Constantly Rising

 The Fidelity Retiree Health Care Cost Estimate finds that, in 2023, a single person aged 65 may need to save around $157,500 after tax to cover their healthcare costs in retirement. An average couple of the same age may need to save approximately $315,000. Let’s take a look at where these costs come from:

According to the Fidelity report, 39% of retirement healthcare expenses lie in Medicare:

  • Part A, which covers hospital costs after you meet a deductible, is free for most individuals.
  • Part B requires an annual premium and covers physician services and outpatient care. Its cost may increase if you don’t sign up when you initially become eligible and the premium increases as your income goes up.
  • Part C is Medicare Advantage and it typically offers more than Medicare, but it is generally offered by a Health Management Organization (HMO). This is often a lower cost alternative for one who is healthy.
  • Part D is prescription drug coverage and also requires a premium which again is adjusted based on income.

Other medical expenses account for 44% of total retirement healthcare costs in the Fidelity study. These include:

  • Co-payments
  • Co-insurance
  • Deductibles for visits to medical clinics

The final 17% goes towards generics, branded drugs, and specialty drugs that aren’t included in Medicare Part D coverage.

How Can Individuals Better Manage Healthcare Costs in Retirement?

Your financial advisor can help by incorporating anticipated costs and resources associated with health care into your financial plan. Preparing for the future by creating a realistic yet extensive retirement plan makes covering medical costs more feasible. Apart from planning early and increasing your level of financial health literacy, there are some practical tips for you to consider:

  • Take care of your body – Healthy habits benefit your body and mind, but they can also benefit your wallet. 30 minutes of exercise a day for five days a week can reduce healthcare expenses by $2,500.
  • Plan for serious health complications – Though it sounds grim, it’s vital to prepare for any and all health issues that may arise later in life. Set aside funds that can help address chronic diseases.
  • Anticipate a long life – Lifespans continue to increase, and you want to ensure that your retirement funds don’t run dry.
  • Explore Investing in a long-term care policy – While more costly upfront, long-term care policies can save you money in the long run by stepping in to help with chronic illnesses and other healthcare expenses.
  • Create a retirement plan with a financial advisor – You wouldn’t trust your medical procedure to an electrician, so it only makes sense that you should seek professional help when planning your finances and retirement.

Talk to a Certified Financial Planner®

Managing healthcare costs in retirement doesn’t need to be a struggle. At ProVise, our Certified Financial Planner® professionals help individuals of various demographics create a personal retirement plan that suits their needs and goals. We take an effective roadmap towards financial success and shape it with your life, increasing your level of financial health literacy and striving towards security along the way. Talk to a ProVise CFP® Professional today to get started.