Don't Forget About This One Major Expense When Planning For Retirement

There is a lot to think about as you plan for retirement, from living expenses to an entertainment budget, but underpreparing in one particular area can quickly derail your best laid plans for living life on your terms. Many people head into retirement assuming that they will simply apply for Medicare and all their medical expenses will be taken care of, but all too often they fail to realize that Medicare doesn't pay for everything, often leaving retirees woefully unprepared for the medical expenses and health care costs that come along with aging.

No one plans to get sick or need medical care in retirement, but throughout the course of life, especially as we age, medical expenses are bound to arise. In its annual Retiree Health Care Cost Estimate for 2024, Fidelity found that the average retiree 65 or older can expect to spend as much as $165,000 throughout their retirement. The problem, Fidelity found, is that Americans on average are only budgeting for approximately $75,000 in health and medical expenses, grossly underestimating what they may actually end up having to pay for.

A recent study conducted by Bankrate discovered more than half of working Americans feel they are behind in their retirement savings. To make matters worse, findings from the Office of Research Data at the Consumer Financial Protection Bureau show that 24% of Americans have no emergency savings. When you combine poor retirement preparedness and an absent emergency fund, the result is retirees who can't afford to pay for their medical expenses or those of their spouses or dependent loved ones.

Since there is no way to pinpoint an exact amount that you will need, it helps to know what types of expenses you could be facing as you age and what to expect from your insurance. If you are planning on using Medicare, be aware that the cost will vary based on your coverage and not everything is covered. In fact, there is no annual limit to the out-of-pocket copays you could accrue unless you have a secondary or a supplemental insurance, like Medicaid (which goes under the name Medi-Cal for residents of California).

On top of regular insurance deductibles and copays, there are expenses you will need to be prepared to pay for should the need arise. These include long-term nursing home care — Medicare will pay for the first 20 days and will pay a portion of the next 80 days, but beyond that, this expense is not covered. Assisted Living is not covered at all and while home health (which refers to having a skilled service like physical therapy or nursing care provided in the home) is covered, in-home caregiving services is not.

It is important to keep in mind that this Medicare coverage is only available once you turn 65 (you may be eligible sooner if you have a disability or certain conditions like ALS or End Stage Renal Disease). Should you be lucky enough to retire early, you may end up paying more out of pocket expenses under other insurance plans, in which case it will be extremely important to have money set aside specifically for unexpected medical expenses.

To prevent yourself from being caught off guard, plan ahead for medical expenses by adjusting your retirement budget to account for these costs. There are plenty of ways to do this, like investing in an annuity to boost your retirement savings or taking advantage of a Health Savings Account (HSA). If you are enrolled in a high deductible insurance plan through your employer, you can use your HSA to set aside pre-tax dollars to pay for health care that don't expire.

Consider setting up a separate savings account for these types of expenses so you aren't tempted to allocate the money to different things (like this unnecessary expense you may later regret), thus ensuring it is there if you need so you don't have to dip into your daily living expenses to pay for health care in retirement.

Staying healthy and getting regular exercise can help reduce your potential medical expenses. The CDC reports that healthcare costs for non-institutionalized adults over 50, meaning those not living in nursing homes or another type of long-term care facility, run $860 billion annually and that 4 out of 5 of the most costly chronic medical conditions can be either prevented or managed through physical activity.