Health Care Costs in Retirement

Julia M. Carlson |

What's the single biggest expense that you will face in retirement? Housing? Recreation? The title of this probably gives it away, how about health care costs? Between Medicare premiums and the portion of medical bills Medicare doesn't pay, health care costs are actually a bigger retirement expense than housing and recreation combined, according to Peter Stahl, founder of Bedrock Business Results, (February 2016) a consulting firm designed to help financial advisers understand their clients' health care challenges during retirement.

Those expenses are likely to grow when you consider that the premiums for Medicare Parts B and D are going up more than 7% a year. The latest Fidelity research shows (February 2016) that a couple who retired last year could expect to spend an estimated $245,000 on health care throughout their retirement years.

What can we do? Plenty. It starts with education – knowledge is power! Because Medicare premiums are based on retirement income, you should take steps to minimize your modified adjusted gross income. One way to do this is by taking a portion of your income needed from tax-advantaged accounts such as Roth IRAs, health savings accounts and permanent life insurance policies. Since these income sources are not taxable it will keep you in a lower tax bracket. Moving a married couple's income just one tax bracket lower can save them $65,000 in Medicare premiums over a 20-year retirement, according to Mr. Stahl.

Health care planning is not just something to do in your retirement either. Younger folks should also take advantage of tax strategies now that will potentially benefit you in retirement. For example, if you have a health savings account through your employer, you would do well to contribute the maximum every year, as those accounts are tax-advantaged. However, try not to use the account now. Instead, fund medical expenses from current income if you can. You'll likely need that money in retirement, when medical costs will be higher and eat up more of your budget.

Julia Carlson is a registered Principal with, and securities are offered through, LPL Financial. Member FINRA/SIPC.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.