Savant - University Wealth Management

Does Your Retirement Plan Include Healthcare Costs?

Report Summary:

  • What Medicare does and does not cover
  • A Health Savings Account may be a viable option for you
  • Tax balance builds flexibility for covering healthcare costs in retirement

One of the biggest considerations before retiring is how your retirement plan accommodates one of the largest expenses in retirement: healthcare. The average life expectancy in the United States continues to rise, resulting in longer periods of retirement. Additionally, healthcare costs have continued to grow at a faster pace than general inflation. Combined, these items make planning for healthcare costs in retirement vital to your success.

Most projections show a married couple retiring at age 65 can expect to spend approximately $315,000 (net of taxes) on healthcare expenses throughout their retirement. That includes premiums for Medicare Part B, prescriptions, and other general medical costs. Planning for these costs early on alleviates their impact and avoids non-tax-efficient emergency distributions.

Using Medicare to Cover Healthcare Costs in Retirement

While working, you have the luxury of health insurance through your university. In retirement, many people rely on Medicare to cover most of their healthcare costs. However, the basic Medicare options can leave holes in your coverage that should be addressed through Medigap coverage or a Medicare Advantage plan, each incurring additional costs.

While Medicare Part A is typically free, Part B carries a monthly premium. This monthly premium is based on a two-year lookback of your modified adjusted gross income (MAGI). For example, if 2024 will be your first year in retirement, your 2022 income would determine your monthly premium. The monthly premiums are on a sliding scale on par with your income from two years ago. Currently, the lowest monthly premium amount is $174.70 but can go as high as $594. As you approach retirement, adjust your income accordingly to save future premium dollars.

Health Savings Accounts Can Cover What Medicare Doesn’t

We believe one of the best tools you can use now to cover future healthcare costs is a Health Savings Account (HSA). Similar to the 403(b) account with your employer, contributions to an HSA go in tax-free and grow tax-deferred. The third benefit of an HSA allows tax-free distributions for qualified medical expenses. This triple tax advantage can help make an HSA the ideal way to fund future (or current) healthcare costs.

Most employers offer the HSA as an option during your working years, and they may even contribute a certain amount into it each pay period. Note that HSAs can only be paired with a High Deductible Health Plan. Lastly, once you sign up for Social Security benefits (and Medicare Part A), you will not be allowed to continue funding an HSA, though you will still be able to pay for qualified medical expenses with it.

Managing Healthcare

Build Your After-Tax Assets Now, Claim Benefits Later

If an HSA is not available or comfortable for you, focus on building your after-tax investment accounts. The majority of a university professional’s assets are in pre-tax 403(b) accounts. While these are great tools to accumulate wealth in your working years, they are not a great way to pay for healthcare costs, as distributions are subject to ordinary income taxes. After-tax assets, such as a Roth IRA or a brokerage account, can be used instead. Only the growth of brokerage account assets will be subject to the lower capital gains tax.

You have flexibility in deciding when to file for Social Security benefits. If you are planning to retire at 62 and immediately claim Social Security solely to help cover healthcare costs, consider waiting to collect your benefit. By claiming at 62, your Social Security benefit is reduced for the remainder of your life. The longer you can delay receiving the benefit, the more it will grow. With increasing life expectancies, a higher monthly benefit is typically the better option.

Talk to Your Financial Planner

Most universities provide retiree options that can include a Medicare Advantage plan or a Medical Supplement plan (often called a Medigap plan), which may be enough to accommodate your healthcare needs in retirement. As you transition into retirement, take time to review various choices, including a comparison with marketplace options to determine which plan and coverage will best suit you. Your financial advisor can help provide insight into the key differences between the plans and help you review your elected coverage to ensure it’s a good fit for your needs.

In your working years, there are several things you can do to plan for significant future healthcare costs. Taking the appropriate planning steps now can help place you in a more secure position as you begin the journey into retirement.

This is intended for informational purposes only and should not be construed as personalized financial or investment advice. Please consult your financial and investment professional(s) regarding your unique situation.

Wise Counsel for University Professionals

Our advisors have specific and in-depth knowledge about university employee benefit programs and retirement plans. We work with university faculty, physicians, and other professionals. We are not associated with any university or any retirement vendor, and we have no access to your private retirement or personnel information.

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