Is Overestimating Your Healthcare Costs a Good Retirement Planning Strategy?

Health care costs for retirement

As you contemplate your retirement, one of the most important considerations is planning and preparing for potential healthcare costs late in life. Many of our readers may ask, “Why should I overestimate potential healthcare costs now, especially when I’m in good health?” 

There are many ways to answer this question, which we’ll explore in this blog. As healthcare costs continue to rise, along with increased longevity, comprehensive retirement planning that includes healthcare expenses can greatly benefit your pursuit of a comfortable retirement with financial security late in life. 


Contemplating your retirement?  Read our latest Quick Guide: “Retire at Any Age: Advice from a Financial Advisor in Buffalo Grove, IL.” 


Let’s begin with the need to overestimate potential healthcare costs. 

In reality, healthcare can be one of the most significant expenses during your retirement. According to the Fidelity Retiree Health Care Cost Estimate, an individual 65 years old in 2023 might require savings of about $157,500 (after-tax) to cover their health care needs during retirement. Similarly, a typical couple aged 65 in the same year could need a total saved amount of approximately $315,000 for the same purpose. 

Overlooking this retirement plan component can jeopardize your financial well-being, leaving you vulnerable during one of the most delicate phases of your life.

Overestimating potential healthcare costs in your later years can have several benefits:

  • Because assisted living, skilled nursing, and memory care cost thousands of dollars per month, planning for these types of expenses better prepare you financially if you or your spouse have additional needs later in life. 
  • By planning for more healthcare expenses, you will be more financially prepared to manage any significant health issues that may arise. Additional funds will be available for other uses if your costs are lower than expected.
  • Knowing you have set aside funds to meet potential healthcare costs can reduce stress and anxiety. You won’t have to worry as much about unexpected expenses because you have planned for them.
  • If you have set aside sufficient funds, you can afford higher-quality care, more options for treatment, or additional services not covered by long-term care insurance.
  • With increases in life expectancy, the risk of outliving your savings (longevity risk) is a serious concern. Overestimating your healthcare costs can provide an additional buffer against this risk.
  • Serious health issues can often result in additional non-medical costs, such as transportation, home modifications, or caregiving expenses. Overestimating healthcare costs can also provide a cushion for these related expenses.
  • Healthcare costs tend to rise over time (rate of inflation + a premium). If you overestimate these costs now, you will likely be better prepared for future price increases.
  • Health policies and insurance coverages can change over time. Overestimating your future healthcare costs can protect you against unforeseen changes in these policies.

This strategy becomes even more important if you’re planning an early retirement. The primary reason is that while your employer-sponsored health insurance may cease, Medicare doesn’t start until you and your spouse reach 65. 

If you’ve made prior arrangements for insurance coverage, potential gaps can expose you to substantial healthcare costs and risks. Options for early retirees include COBRA continuation coverage, purchasing private insurance, or joining a Health Care Sharing Ministry. However, these alternatives can be costly and less comprehensive than your previous coverage during your working years.

It’s also worth noting that not every retiree needs long-term care. According to the U.S. Department of Health and Human Services, about 70% of people over age 65 will require some type of long-term care services during their lifetime. Though not everyone will need it, the high costs associated with this type of care make it a critical factor to consider in your retirement plan.

Rising medical costs

With medical inflation persistently outpacing the CPI, the average healthcare cost in retirement will only rise in the future. This inflation can be attributed to advances in medical technology, increased demand for services, supply and demand for professionals, and higher healthcare provider costs. Investigating this upward trend in your community while planning for your healthcare costs is always prudent.

The golden rule of finance – “it’s never too late to start saving”- also applies to your retirement plan for managing health care costs. Setting aside funds for future healthcare costs can help you avoid financial stress even if you are close to retirement. Working with a financial advisor can be instrumental in creating an effective plan. 

The benefits of hiring a Buffalo Grove retirement planner for healthcare planning include their knowledge of tax-efficient strategies, potential cost savings, and the ability to estimate future costs that will impact you. 

Retirement Medical Savings Accounts (RMSA) 

These employer-sponsored accounts are designed to help you save for healthcare expenses in retirement, offering tax advantages to increase your savings. Your contributions are often tax-deductible; withdrawals for qualified medical expenses are tax-free. RMSA accounts provide a cushion for healthcare-related expenses and can be a significant element in your retirement planning strategy.

The SGL Difference

While the possibility of not needing long-term care or retiring early may tempt you to underestimate healthcare costs, it’s prudent to err on the side of caution. You have drastically reduced options late in life. The combination of your health and rising medical costs as you age necessitates preparing for the worst-case scenario while hoping for the best at the same time.

A comprehensive retirement plan hinges on asking the right questions and obtaining sophisticated solutions. Clarifying your circumstances, concerns, and goals help us identify your specific needs and develop a tailored retirement plan that includes healthcare.  

At SGL Financial, we adopt a proactive stance to pre-empt any potential hiccups as we guide you along your financial journey during retirement. Our commitment to constantly updating our advice ensures we deliver the right advice at the right time. 

Remember, financial planning for your retirement isn’t about predicting the future; it’s about being prepared for it. So, overestimate, prepare, and enjoy a carefree retirement. Connect with the SGL Financial team to learn more about our comprehensive retirement planning services in Buffalo Grove. 

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