How Much Are You Budgeting for Retirement?

Many long-term financial plans involve setting a target for a total amount of savings. Sometimes, this target is framed as multiples of income, and other times as a general round number. These goals are helpful in the accumulation phase of our lives, but it is also financially prudent to estimate what your spending might be in retirement during the decumulation phase.

Part of constructing a budget for retirement involves carrying everyday expenses forward, adjusted for inflation. Spending on staples like food, energy, and clothing can flow from one phase of life to another. Typically, planning software will adjust these spending patterns for inflation.

Housing spending can follow many paths, offering you flexibility and preparedness for different scenarios. Some plans may carry a mortgage into retirement. Others may only account for maintenance and insurance on a debt-free residence. Maybe a plan involves downsizing and renting, where the accumulated equity from the sale of a home is invested to help bolster a nest egg.

Today, however, in America, there is no bigger question than what healthcare costs will be in retirement.  Between the opacity of hospital charges, the staggering costs of medication, and the complexity of insurance options available, it is no wonder that survey after survey cites healthcare and medical costs as one of the biggest stresses in financial planning.

So how does one start to plan for an unknown as big as medical expenses? Let’s start with the basics.

Health insurance in the golden years can come in three main forms – private insurance, Medicare, and Medicaid. This variety of options ensures that you can find a plan that suits your needs and budget.

• Private insurance will entail high premiums paid monthly, and the coverage will depend on the type of plan, the level of premium paid, and whether care is in or out of network. 
• Medicare is the public government option that kicks in at age 65. It has four parts: hospital insurance (Part A), medical insurance (Part B), Medicare Advantage plans (Part C), and drug coverage (Part D). 
• Medicaid provides free or low-cost insurance for those with disabilities, elderly citizens with lower incomes, or other eligibility-driven scenarios.

What Are the Costs? 

Healthcare.gov estimates those who are 60 years old can expect to pay more than $1,000 monthly in health insurance premiums for an Affordable Care Act (ACA) plan. Medicare has costs based on income for each part. Part A might be “premium-free,” $259 or $471 monthly. Part B has a base $148.50 premium. Part D will price its premium based on the plan and will have additional surcharges ranging from $12.90 to $81 based on income tax bracket.¹

Optimizing income and planned savings should be considered among the strategies to prepare for medical expenses and healthcare premiums. Many plans assess costs in line with your income, so you can work with a financial planner to optimize your assets to produce enough income to live on, but not so much that it costs you more to care for your health.

Additionally, suppose you’re one of the estimated 36%² of private industry workers with access to a Health Savings Account. In that case, you can take advantage of the triple tax benefit to accrue a dedicated nest egg for those healthcare costs. For example, the current HSA contribution limit is $4,150 for an individual and double that for a family. If an individual contributes each year from age 30 to 65 and leverages the additional $1,000 catch-up contribution after age 55, they can save $159,400. 

Consider, too, that most HSAs allow those contributions to be invested. Projecting the savings out with a conservative 5% compound rate of return would net $410,298 by age 65³; remember the triple tax benefit – contributions reduce your taxable income, investment growth is tax-exempt, and withdrawals for qualified medical expenses are tax-free.

Retirement spending can be challenging to solidify, especially accounting for significant unknown variables like tax rates and medical expenses. Setting a plan and reviewing the savings dedicated to each piece of the plan can help you feel more prepared to meet those unknowns. Some aspects are out of your control, but you can temper some worry by preparing a plan.