Why It's Important to Help Your Clients Save for Medical Costs in Retirement

Christine Simone
February 7, 2024

One of the greatest concerns Americans have today is how to plan for a comfortable retirement after exiting the workforce. Based on available data, those concerns are justified. Fidelity Investments estimates that the average couple retiring today will need approximately $300,000 to cover their medical costs alone in retirement. 

Financial advisors can help their clients address these concerns by incorporating healthcare and medical costs into their retirement strategy. Some medical costs in retirement are easier to plan for than others. For instance, the data on average medical spending in retirement at least provides a baseline amount to save for. And long-term care costs can typically be planned for with life insurance riders or standalone long-term care insurance. 

But Medicare planning, medical emergencies, and clients’ unique medical situations can be more challenging to plan for adequately. Each client has very unique medical needs, so relying too heavily on average costs as a benchmark doesn’t result in very comprehensive planning. 

Building a comprehensive financial plan for your clients does of course require you to understand common challenges older Americans face when navigating the healthcare system in retirement. But excellent comprehensive planning should also include cost optimization over the years and highly personalized data-gathering to predict a clients’ unique costs.

What Healthcare Costs Look Like for Retirees on Average

Managing rising healthcare costs is a challenge for people of all ages, but it’s a particularly pressing issue for individuals in or nearing retirement. 

As people age, medical conditions are more likely to materialize and existing conditions will potentially worsen. The greater the need for medical care, the more the expenses start to add up. A recent RBC Management report states, “even when Medicare coverage is factored in, by age 75, health care expenditures will account for 15% of … overall spending.”

Knowing that the need for medical care will increase for older policyholders, insurance companies offset their future expenditures by raising insurance premiums according to the age of the applicant. The average monthly premium for a Silver health plan policyholder at the age of 21 is $410. The exact same plan for a 55-year-old is $914 and an astounding $1,230 for policyholders aged 64.


To help your clients plan for healthcare costs in retirement, inflation rates are also an important factor to consider. Increases in medical costs historically have significantly outpaced regular inflation. Merrill Lynch suggests factoring an annual increase of 5-6% to your estimate for your clients’ future healthcare costs.


Customized Healthcare Planning for Individual Clients

The best thing your clients can do is build a sound strategy to account for these increasing costs and start saving for them sooner rather than later. However, using average costs as a benchmark for what all clients can expect to pay for healthcare in retirement is not a sound strategy. 

Some clients will need prescription drugs with enormous out-of-pocket costs that aren’t covered by their new Medicare plan. Others will require more digging for the right Medicare Advantage plan to cover the costs of their unique treatments.

If the retirement plan doesn’t account for these healthcare needs, their entire plan can be derailed. As with their travel goals, housing goals, and other lifestyle goals in retirement, your clients’ healthcare savings strategies should be customized to their unique needs and circumstances. 

Accounting for Healthcare Costs in Your Clients’ Retirement Plans

Saving for medical expenses in retirement may not be as exciting as saving for a home or travel fund, so many people don’t make it a priority. But the savings strategies can be similar. As a financial advisor, you can help your clients understand the importance of factoring medical costs into their retirement plan in the same way they save for other retirement goals based on their unique values and situations.

One way to more accurately predict clients’ unique healthcare costs is to use a healthcare cost estimator. Healthcare cost estimators allow you to input clients’ unique data to learn more about their expected costs for healthcare plans, specific medical procedures, and overall long-term predicted costs. However, this strategy is not foolproof and can become overwhelming

Healthcare savings strategies may require that you outline a specific percentage of their retirement savings goals for future healthcare costs. It may also include the dedicated savings and investment accounts that are best suited to this type of savings bucket, such as a separate IRA or health savings account (HSA). 

Due to early withdrawal penalties, most retirement accounts address your clients’ long-range savings goals but may not be ideal for addressing immediate needs. For shorter-term, unexpected medical events, building an emergency medical fund with higher liquidity and penalty-free access is beneficial to people of all ages. 

Individual Retirement Accounts

For individuals contributing to an employer-sponsored 401(k), opening an Individual Retirement Account (IRA) dedicated to healthcare savings may be a worthwhile consideration. A Roth IRA can be an optimal vehicle for your clients to grow their wealth tax-free and also withdraw funds tax-free later in life when their healthcare expenses are likely to increase. 

Contribution limits associated with these types of investment accounts limit your clients’ ability to meet all of their retirement goals. But opening additional accounts specifically for the purpose of saving for healthcare costs in retirement can be an optimal solution. 

Health Savings Accounts

An HSA is another way to save and invest money specifically to go towards medical expenses, both in the short-term and later in life. An HSA is unique in that it offers a triple tax benefit: pre-tax contributions enable your clients to reduce their taxable income, enjoy tax-free growth, and make tax-free withdrawals for qualified medical expenses. 

The list of qualified medical expenses associated with an HSA is broad and advantageous for the flexibility it provides. Your clients can use the funds accumulated in their HSA for the following medical costs and more:

  • Doctor’s visits
  • Hospital stays
  • Vision and dental care
  • Mental health services

The annual contribution limit in 2022 is $3,650 for an individual and up to $7,300 for individuals enrolled in a family plan. An additional $1,000 per year catch-up contribution is allowed for individuals over the age of 55. However, in order to make contributions to this triple-tax-advantaged account, your client must be enrolled in a high-deductible insurance plan.

An HSA is a great supplemental investment vehicle for long-term growth in conjunction with a more broad investment account such as a Roth IRA. Your clients can accumulate a significant tax-free reserve for future medical expenses by making the maximum annual contribution and allowing their money to grow tax-free. And they can use the savings inside the HSA at any time without penalty for qualified medical expenses if they need to.

Partner With Caribou to Best Serve Your Clients’ Healthcare Planning Needs

A healthcare savings strategy within a comprehensive retirement plan will best position your clients to be able to afford the increasing healthcare costs they’re likely to face as they age. A robust healthcare strategy helps clients be prepared for immediate medical needs and use long-term investment and savings vehicles to plan for future needs.

But even with the best long-term retirement strategy in place, it can be incredibly challenging to predict the future of healthcare costs for clients’ unique medical needs and circumstances. Fortunately, you don’t have to be an expert in healthcare to effectively advise your clients. 

At Caribou, we partner with fiduciary financial advisors to help add medical costs and healthcare expenses into the comprehensive financial planning process—all from a standpoint of customization for each client. To see if we can help you take the guesswork out of incorporating healthcare costs into your clients’ retirement strategies, click here to schedule a conversation today.

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