How can I plan for healthcare costs in retirement?

Questions you can ask your UBS Financial Advisor:

  • What will healthcare costs be in retirement? How much do I need to save?
  • How much of my healthcare costs are covered by Medicare and Medigap policies versus out-of-pocket?
  • How do factors such as income level and state of residence impact healthcare costs?

The good news is that Americans are living longer than at any time in history. And while wealthy retirees have a high degree of confidence in their financial stability, many worry far more about potential health issues, according to a recent UBS Investor Watch survey.1

Healthcare in retirement remains a complex topic, leaving many investors without a specific plan, often because they don’t know what to do. Yet, planning today for the increasing costs of healthcare in retirement can address your concerns and reduce retirement worries. Planning for these expenses within a “longevity” portfolio—one that seeks growth to fund expenses throughout your lifetime—can help give you the confidence in meeting these goals.

CIO Americas, Wealth Management (CIO-A WM) offers insight on how to plan for healthcare expenses in retirement in the second edition of the new series: Modern Retirement Monthly (PDF, 422 KB). With overall healthcare costs expected to increase twice as fast as other costs in retirement, it’s critical to plan for future healthcare expenses.

What healthcare in retirement really costs

While virtually all Americans over the age of 65 are covered by Medicare, according to CIO-A WM, a 65-year-old couple needs to have saved between $300,000 and $600,000 at the start of retirement in order to cover future healthcare expenses. With Social Security roughly the equivalent of a $1.2 million asset, according to CIO-A WM, this means that Social Security should fully fund healthcare expenses for current retirees. However, retirees have to account for those expenses in their overall plan – or they might not have as muchdiscretionary income in retirement as expected. And according to a report by HealthView Services on healthcare cost projects compared to CIOs broad-based inflation expectations, retirees should expect their overall healthcare costs to increase twice as fast as other costs in retirement.2

One reason why many investors fail to properly prepare for retirement healthcare costs is the assumption that Medicare covers all expenses. The reality is that Medicare covers some but not all of your healthcare costs: You are responsible for premiums, deductibles and co-pays associated with Medicare parts A, B and D, Medicare supplemental insurance, and dental insurance, as well as other out-of-pocket expenses. And the amount of some of these payments can change from year to year.

What matters: where you live and your income sources

Healthcare costs vary between states primarily due to higher out-of-pocket expenses for people who live in states whose Medigap policies do not cover prescription drugs. While Medicare premiums are uniform across the country, Medigap policies vary and can drastically increase the amount of out-of-pocket expenses for some retirees.

Generally speaking, if you live in a state with a higher cost of living, you can expect higher retirement healthcare expenses. For example, a 65-year-old couple living in New York could expect to pay almost $16,000 in annual healthcare costs, while the same couple in North Carolina could expect to pay about $12,000.

Also, your Medicare premiums fluctuate based on your modified adjusted gross income, defined as your adjusted gross income, plus these, if any: untaxed foreign income, non-taxable Social Security benefits and tax-exempt interest. Although it is estimated that only 5% of retirees pay surcharges on their Medicare premiums, be mindful of these extra charges when planning how and when you will receive income during retirement.

The impact of long-term care expenses

When planning for retirement, it is also important to not forget about long-term care. Healthcare and long-term care (LTC) need to be handled separately in the planning process. LTC expenses can have a significant effect on an overall financial plan, but many investors are not prepared for the potential cost. While many recipients of LTC receive medical support, not all LTC is medical in nature—and Medicare does not cover the vast majority of LTC expenses.

For more on how to plan for healthcare expenses in retirement, read the full report (PDF, 422 KB).
Do you have enough for healthcare?

Is your portfolio prepared to cover future healthcare expenses? Together we can find an answer. Connect with your UBS Financial Advisor or find one.

1 UBS Investor Watch 3Q17: Retiring old clichés
2 HealthView Services 2017 Retirement Health Care Costs Data Report