Help protect your retirement by planning for healthcare costs

The opportunity to experience the world with decades of memories can be a beautiful gift. But a long life can require extensive (and sometimes expensive) upkeep, especially in the later years. In particular, unforeseen healthcare costs in retirement can jeopardize the savings you've carefully built up over time.

While you can't predict what kind of health challenges you'll encounter or their financial consequences, you can take steps to help shield your family's finances from the potential impact of surprise medical issues.

Health-related expenses generally rise with age, as a report from Peterson-KFF shows. In the U.S., people age 35 and younger were responsible for only 21% of the country's total health spending in 2019 despite making up 45% of the population. Yet people 65 and older accounted for 35% of spending even though they made up only 17% of the population.¹

Your current health status and your family health history can offer clues about the health issues you could develop over time. More broadly, research shows many older adults today are facing chronic conditions like diabetes, arthritis and heart disease. The National Council on Aging found that nearly 95% of people age 60 and older in 2018 had at least one chronic condition, and nearly 80% had two or more.²

Other medical costs can add up during the retirement years, including hearing aids, routine eye exams, dental procedures and other services that aren't generally covered by Medicare. It's also sometimes necessary to pay for assistance with the tasks of daily living, like bathing, grooming, mobility and taking medications—and the price tag for this can be steep.

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Planning for healthcare costs in retirement can help you safeguard against the financial surprise of unforeseen health events. Here are four options to consider:

You might consider creating an account solely for potential healthcare emergencies that's separate from your other accounts and investments. You may want to choose one that lets you access your money quickly, like an interest-bearing savings account or money market account.

If you need to free up money, you can analyze your budget to discover which expenses you could reduce. Other alternatives are to build it up using side-job income, employment bonuses, one-time cash gifts, tax refunds, windfall money like an inheritance or extra reserves from your investment portfolio.

Although these earmarked funds can help you pay for some medical services, they may not cover extended health events. You may need more solid plans in place to truly offset the risk to your savings.

If you have a high-deductible health insurance plan and are not on Medicare, you may qualify for a health savings account, or HSA. It's a special account that allows you to deposit pre-tax dollars to spend on qualified medical expenses, including doctor visits and certain home healthcare supplies. Your employer may offer an HSA program as part of your benefits, or you can open one on your own at a bank or other financial institution.

Any money you spend on healthcare expenses doesn't incur income tax. The IRS sets annual contribution limits for HSAs, but if you don't spend all the money you've put in for one year, you can let it roll over. With some accounts, you can invest and earn interest on HSA funds. And the returns you earn aren't subject to income tax.

The funds you contribute before you retire can compound and carry over to help with expenses you incur down the road, acting as a safety net for when you potentially need to spend more on healthcare as you age. Plus, HSAs are portable, so yours will stay with you even if you change jobs.

HSAs are often confused with flexible spending accounts (FSAs), but they're not the same. With an FSA, you may lose any unused funds at the end of the year, and if you leave your job, anything you haven't spent usually goes back to your employer.

While Medicare will cover many of the costs for your healthcare and supplies, you'll likely still have related out-of-pocket expenses that can be costly. These include copayments, deductibles and coinsurance, which is the money you owe after you've met your deductible.

Medicare supplement insurance can help fill the gap between what Medicare pays and the total cost of a covered medical expense. You must have Medicare Part A and Part B to get the insurance, which is offered by private insurance providers and also referred to as Medigap.

If you live independently throughout your retirement years, augmenting Medicare with Medicare supplement insurance could potentially help cover many of your medical costs without harshly impacting the rest of your finances.

Long-term care scenarios can be some of the most difficult to think about emotionally and financially. Not everyone can stay independent into their later years. You'll have to consider to what extent you'll lean on family and friends for support and think through the toll that could take on you and your loved ones. You may also need to consider in-home assistance or an assisted living facility.

Government statistics say that almost 70% of Americans will use some kind of long-term care support service at some point in their lives. Yet most people aren't ready.³

Thrivent's 2022 Extended Care Survey shows that 43% of surveyed adults aren't prepared to pay for extended care on a monthly basis for the foreseeable future. Only 13% said they feel "very much" prepared and have the financial resources to pay for it.⁴

Unfortunately, Medicare and most health insurance plans don't cover long-term care. Self-funding is one way to approach this financial burden, but it's not a possibility for everyone. Some people rely on Medicaid to cover long-term care, but this can involve making the difficult decision to spend down assets just to qualify for the program.

Long-term care insurance is an option to consider. These contracts, which are sold by private insurance providers, cover the cost of qualified daily living support when you are no longer completely self-sufficient in day-to-day tasks. It can provide you with options for care while remaining in your home and can help protect your family from the strain of dire financial consequences. A similar option is a hybrid of long-term care insurance and life insurance, which can offer flexible coverage to fit your healthcare needs.

Thoughtful healthcare planning is an important component of retirement planning. Yet with so many murky variables, it can be challenging to estimate how much to save for healthcare in retirement. With the strategies listed, you have some options to help prepare yourself and your family—whether it's putting what you can into an account for healthcare emergencies or adding Medicare supplement and long-term care insurance to your financial defenses.

A Thrivent financial advisor can partner with you around your savings, concerns and wishes to help you financially prepare for the future—no matter what that looks like.