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Solving The Problem Of Skyrocketing Retiree Healthcare Costs

Solving The Problem Of Skyrocketing Retiree Healthcare Costs


10,000 baby boomers are retiring every day, and they are in for a shock when it comes to healthcare. The problem of paying for retirement healthcare expenses is a multi-faceted issue characterized by ever-increasing healthcare costs, lack of awareness about the problem, and inefficient and insufficient savings. But for eligible individuals, health savings accounts (HSAs) can serve as healthcare-specific nest eggs and help create more secure financial futures.

Issue #1: Increasing healthcare costs

Many people still believe that Medicare will be their healthcare answer in retirement, but Medicare only covers a portion of retirement healthcare costs. A recent study from Healthview of retirement healthcare costs estimates that the average couple retiring at 65 will pay $387,000 in medical expenses above and beyond Medicare. These non-Medicare-covered healthcare costs will have to come out of retirees’ savings, pension, or income. And healthy people don’t escape these costs, because a significant portion of the $387,000 is from insurance premiums, which retirees will incur as long as they live.

Also, Medicare premiums alone can be a significant expense for many retirees. According to a 2012 AARP study, paying for premiums and deductibles for the traditional Medicare choices of Parts A, B and D can cost retirees over $3,000 per year (and that number has only increased since then). Even if they don’t face many other costs, paying for Medicare can eat up retirees’ retirement savings.

Even the recent increase in Social Security benefits provides little or no help for many retirees. Higher Social Security benefits translate into higher Medicare premiums, effectively netting out at a loss when the effects of inflation are considered. And in 2018, the top Medicare brackets were compressed, resulting in higher premiums at lower income levels than 2017.

Issue #2: Lack of awareness

Healthcare costs are one of the most significant and unpredictable challenges faced in retirement; they are also one of the least-understood elements of retirement.  Most people avoid discussions of Medicare and Social Security until the last minute because of the perceived (and actual) complexity of the topic.

A recent Fidelity study found that 33% of early retirees admit to having no idea what their healthcare costs would be. Those that were brave enough to hazard a guess were much too low (46% thought their costs would be less than $100,000). No wonder, then, that one of the greatest fears retirees face is how to pay for healthcare; it is a nearly total unknown to them.

Issue #3: Decreasing retiree healthcare coverage

The last facet of this problem is the demise of retiree healthcare coverage; retiree health plans are now almost as rare as CD players and rotary phones.

A 2016 study by Kaiser Family Foundation which included five national studies found that there was a “significant drop in the share of large employers (200+ workers) offering retiree health coverage, from 66 percent in 1988 to 23 percent in 2015.” As a result, 49% of employees are using personal savings to cover retirement healthcare expenses and 24% are using their Social Security income. Only 14% have an HSA, and only 6% are using some other retiree health account.

Solutions for individuals:

There are a few things that each individual can do to improve their situation:

  • • Learning as much as you can about the true cost of healthcare.
  • • Doing everything you can to preserve your health.
  • • Putting money away with tax savings in mind (remember, taxable income can impact your Medicare premiums).
  • • Opening and aggressively funding an HSA. HSA funds are dual purpose; they can be used tax-free for retirement medical expenses or as taxable income (like an IRA) for other retirement expenses.
  • • Continuing to work and staying on your employer’s insurance. The earlier Fidelity study found that 56% of employees retire earlier than planned, and 30% do it because of a health-related issue.

Solutions for plan sponsors:

  • • If you haven’t done so already, shift to an HSA-qualified high deductible health plan.
  • • Begin describing health care savings and HSAs as part of a comprehensive retirement strategy.
  • • Educate, educate, educate on true cost and the various alternatives for funding retirement healthcare costs.
  • • Encourage HSA adoption and savings.
  • • Make an employer contribution to the HSA.
  • • Couple an employer HSA contribution to wellness participation.
  • • Consider diverting a portion of 401(k) match dollars to HSA contributions.


While medical expenses for retirees are a given, HSAs can help soften the blow by creating tax-free, healthcare-specific savings funds. Learn more about HSAs here or sign up for an account.

Author: James Denison