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Illustration of a healthcare concept with a clipboard and medical supplies. A text overlay from SYM Financial Advisors explains that married couples aged 55 who are "healthy" may spend more on healthcare costs over their lifetimes than a 55-year-old with "fair" or "poor" health.

Hidden Healthcare Costs in Retirement

Most people begin to form a picture of what they’d like their retirement to look like as the years progress. They may have a good sense of where they want to live, who they want to spend their time with, and what activities they’d like to enjoy. While some aspects of this hypothetical “retirement brochure” can have costs reasonably estimated, there are other items that are less concrete, or that may get overlooked altogether.

One of the most common and, frankly, unpredictable of these can be healthcare costs. No matter how “good” you imagine your current health insurance plan to be, healthcare costs can be wildly volatile. In retirement there can even be hidden components that can do significant damage to your retirement spending plans.

About 5% of the U.S. population accounts for roughly 50% of all healthcare spending.[1] As you might guess, that 5% represents the post-retirement-age demographic in the country. On the far high end of spending, the top 1% of U.S. healthcare spenders will dole out a whopping $130,000+ per year! While no statistics document how many of that group expected their healthcare expenses to climb that high, one can safely imagine that many, if not most, did not. Let’s unpack some of the more common hidden healthcare costs in retirement.

Hidden Cost #1 – Healthcare Costs Can Massively Outpace Inflation

The need for healthcare almost inevitably rises as we age, and whether you’re eligible for Medicare or not, it’s not uncommon for Medicare to not cover all of these expenses — and of course, it isn’t available until age 65. Medicare can serve as a fine baseline, but as is often the case with other insurance, it can have significant gaps, especially when it comes to prescription drug and vision/dental/hearing coverage.

Even worse, inflation within healthcare services has been rising faster than the total economy’s inflation for quite some time. While many tremendous advancements have been made with pharmaceuticals, surgeries, and outpatient treatment in the past 30 years, the industry is on the precipice of being overwhelmed with an extremely large group of consumers — the Baby Boomers.

The resulting persistent rise in annual costs speaks to why over 40% of U.S. adults — with health insurance — have fears about being able to afford unexpected medical costs and long-term care for themselves or a family member.

Though the pandemic led to a few quiet years for healthcare costs, they have recently picked up their long-term trend of outpacing broad economic inflation by several percentage points per year.

For high-net-worth retirees, it can be easy to assume that their strong income levels can pick up any slack when unexpected high healthcare costs knock at their door. Through supplemental insurance and out-of-pocket payments, this may be true for some. But being unprepared can put a sizeable enough dent in annual spending to necessitate tradeoffs in retirement. It’s also worth noting that the most cutting-edge medical procedures and treatments — services that if needed you might be inclined to spare no expense for — will be the very procedures and services least likely to be initially covered by insurance. Even if you are paid back at a later time, there could still be a need for a large amount of cash to be available on hand.

Hidden Cost #2 – Higher Overall Costs for…the Healthy?

This may seem like a paradox, but a married couple aged 55 that identifies as “healthy” will likely actually spend more money on healthcare over the remainder of their lives than a 55-year-old couple that identifies as having “fair” or “poor” health.

Healthy people live longer, and more years equates to more healthcare expenses, even without catastrophic medical needs. A 55-year-old couple in 2022 looking to retire in 10 years can expect to spend over $1 million on their healthcare in retirement. This figure rises[2] to nearly $1.75 million for a 45-year-old couple.

Living longer — while certainly a blessing — will mean more years of higher healthcare cost inflation stacking up as well. And these figures all exclude long-term care, which can carry its own wide range of additional expenses depending on the level of care that is needed in the future.

Prepare with HSAs, Supplemental Insurance

Health Savings Accounts (HSAs) are currently offered by about 57% of U.S. employers and have powerful tax advantages for those who are eligible to contribute. You get to set aside pre-tax dollars into the HSA, it grows tax-deferred, and so long as the money coming out is going to pay for medical expenses, you can use the money tax-free. It’s the ultra-rare tax trifecta!

In order to be eligible for an HSA, your current health insurance will need to qualify as “high deductible” (not less than $2800 for a couple in 2022; $1400 for an individual). You may even be able to set up an HSA on your own behalf through a bank or financial institution, if your employer doesn’t offer them.

Individual contributions to an HSA can be up to $3650 in 2022 ($7300 for couples), with an additional $1000 per person available as a step-up contribution beginning with the tax year you turn 55.

The beauty of the Health Savings Account is that money not used in a given year for medical expenses rolls over to the next year, with no tax implications. So if used correctly — as a camouflaged retirement account, with no intention to spend the money prior to retirement — you can get a significant tax benefit by saving away tax-free income for years to pay the bulk of your healthcare expenses come retirement.

HSAs can cover a wide range of expenses, including some long-term care expenses and COBRA/continuation coverages. HSA accounts are also portable and can move with you freely if you change jobs.

Parting Thoughts

Nobody can predict how the future of their healthcare expenses will play out. Some expenses may look linear over time, others could be very spiked and volatile. By using every tax advantage at your disposal, and having financial partners with precision strategies, you can prepare for the unknown with confidence and calm.

Reach out to a SYM Financial team member today to refine your plan to maximize your tax-preferred savings for future healthcare expenses.

Disclosure: The opinions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. SYM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

This blog is for informational purposes only and does not constitute investment, legal or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor.

Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness.

[1] https://www.healthsystemtracker.org/chart-collection/health-expenditures-vary-across-population/#Share%20of%20total%20health%20spending,%202019

[2] http://testing.hvsfinancial.com/hvsfinancial/wp-content/uploads/2020/03/Health-in-Retirement-Planning.pdf

Disclosure: SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

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