Managing Soaring Health Costs on a Fixed Budget

Content updated as of February 28, 2024

According to a recent study, healthcare costs are the top spending concern of American retirees1 – and justifiably so. For most Americans, health care is expected to be one of the largest expenses faced in retirement, alongside housing and transportation. In fact, Fidelity’s Retiree Health Care Cost Estimate found that the average retired 65-year-old couple can expect to spend around $315,000 on healthcare expenses in retirement.2 What’s more, an average healthy 65-year-old couple who retired in 2023 will likely use as much as 70% of their lifetime Social Security benefits to cover medical costs in retirement.3

As healthcare costs have been increasing at one-and-a-half to two times the rate of overall inflation,3 this trend shows no sign of slowing down. In fact, according to the Centers for Medicare and Medicaid Services, healthcare costs are predicted to increase by an average of 5.1% annually, reaching $6.8 trillion by 2030.4 

While these figures are enough to give even the healthiest consumers a case of severe sticker shock, the impacts are especially severe for those on a fixed income. Whether you’re already retired or making the transition out of the workforce, understanding and planning for mounting medical costs is essential.

Understanding the Costs
So where exactly are Americans spending the most healthcare dollars? For the average American retiree couple, 17% of healthcare expenses are for generic, branded, and specialty drugs, while 39% of costs go toward Medicare Part B and Part D premiums – for doctor appointments and prescription drug coverage.5 Other medical expenses account for the remaining 44% of healthcare spending. These include copays, coinsurance, and deductibles for doctor visits.5

As out-of-pocket expenses eat away at retirement income and premiums remain on the rise, many retirees are left facing challenges to make ends meet – while balancing other retirement costs. Fortunately, there are some strategies to help maintain your healthcare costs on a fixed budget. As always, we also recommend reaching out to the appropriate government agencies for more tailored discussions of healthcare programs such as Medicare.

  1. Prioritize Preventative Healthcare
    Perhaps there is no better medicine than preventative medicine. After all, while you may not have complete control over all aspects of your health, you do have the ability to assess your current status and make changes accordingly. Annual checkups, participation in screenings for illnesses, and a healthy lifestyle serve as effective methods to comprehend your health risks, identify areas for improvement, and potentially ward off ailments. By prioritizing prevention and early detection, not only can you increase the likelihood of staying healthy longer, you can also reduce long-term healthcare expenses and enhance your overall quality of life. Not sure where to begin? Medicare offers a range of preventative care benefits without facing deductibles, fees, or co-pays. You can review the full list on Medicare’s website at any time.
  2. Know What Medicare Covers (and Doesn’t)
    While Medicare offers assistance with a wide variety of healthcare expenses during retirement, it’s important to note that it does not cover everything. While Medicare Parts A and B (Original Medicare) cover a portion of hospital stays and medical services, they do not include coverage for vision, hearing, dental care, prescription drugs, or medical care outside of the United States. With this in mind, many retirees opt to supplement coverage with an additional prescription drug plan (Medicare Part D) and a Medicare Supplement Insurance Policy, also known as Medigap. These policies can alleviate out-of-pocket expenses as long as you maintain Original Medicare. Alternatively, Medicare Advantage Plans (Part C) offer a private insurance option that consolidates much of this coverage, though it often confines you to a limited network of healthcare providers. The costs of supplemental Medicare plans vary depending on the type of policy as well as your state’s pricing structure, so it pays (literally) to do some research to find the plan(s) that best suit your needs.
  1. Comparison Shop for Healthcare Services
    Before committing to significant purchases like a new car, TV, or home repair services, it’s common practice to shop around and obtain multiple estimates. Surprisingly, many of us don’t apply the same approach to medical expenses. Just like these big-ticket expenses, healthcare prices can vary significantly among doctors, hospitals, pharmacies, and treatment and testing centers in your area. Opting for a less expensive option with comparable quality could result in savings of hundreds, if not thousands, of dollars. When your physician recommends a routine procedure, such as an ultrasound or MRI, it’s essential to note down all the details, including the procedure’s CPT code. It’s also a good idea to ask for pricing information prior to scheduling, and if possible, request a hard copy (or e-copy via email) for your records. Additionally, there are nonprofit websites that allow you to plug in a CPT code to see the average cost of the procedure in your area – you might be astonished by the substantial price discrepancies for the same service! When researching and comparing prices from various providers, you may also consider asking about paying for services in cash – many facilities and providers offer discounts for cash payments in place of insurance.

  2. Double Check Your Medical Bills
    When it comes to expenses, nobody likes surprises – especially when it comes to medical bills. Yet, mistakes in medical billing are quite common, with an estimated 80% of medical bills containing some type of error.6 With this in mind, double-checking your bills can pay off (literally)! While bills can be complex and confusing, there are a few fairly simple measures you can take to make sure your medical bills are correct before paying them. For starters, always check that the bill matches your “Explanation of Benefits” from your insurance company. It’s also a good idea to verify that the dates of service, provider information, services, diagnoses, and any other treatments are correct. If you are unsure about a charge, you can ask for an itemized bill, to see each service broken down into single items. Also beware of any duplicate charges or services recorded that were not received. Taking these steps are well worth your time and effort as they can potentially save you from paying the price for costly errors.
  3. Establish an Emergency Fund
    Out-of-pocket expenses are inevitable – especially when it comes to healthcare. Yet, many Americans are not financially prepared for these potentially high costs in retirement. That’s why it’s more important than ever for retirees to stockpile savings for these unforeseen expenses in an emergency or “rainy day” fund. By setting aside a pool of funds for occasional expenses that are bound to happen overtime, you’ll be better financially prepared and less likely to be left facing financial difficulties. Whether you automate your savings with a recurring transfer of funds every month or identify opportunities to save money and redirect the funds into your emergency fund, even small incremental contributions can add up over time. And if you could use another source of cash flow to establish your fund, tapping into your home’s equity with a reverse mortgage could be a viable option. We’ll cover more on that shortly.

Leveraging Home Equity to Fund Healthcare Expenses
From rising premiums, to co-pays and deductibles, today’s healthcare expenses are only mounting. And with 12% of the average retiree’s retirement income going toward covering medical expenses,7 many are looking for an additional source of cash flow to help fund these healthcare expenditures. Fortunately, there’s another untapped source of wealth – your home! A Home Equity Conversion Mortgage (HECM) – also known as a reverse mortgage – is an FHA-insured program that allows you to convert a portion of  your home’s equity into cash. Available to homeowners aged 62 and older, the program was designed specially to help older adults improve their cash flow in retirement. And with today’s seniors accounting for a record amount of housing wealth, you may be surprised to find just how much equity is built up in your home.

How does it work?
With a reverse mortgage, you continue to live in your home without having to make regular monthly mortgage payments (keeping up with property taxes, insurance, and maintenance is required). Unlike a traditional “forward” mortgage where the borrower must begin repaying the loan immediately, reverse mortgage funds do not have to be repaid until a qualifying event – such as when the final borrower no longer lives in the home as their primary residence.8

Since reverse mortgage funds come from your home’s equity, they can be used however you see best fit. And with several disbursement options, many homeowners appreciate the flexibility that comes with a reverse mortgage. You may choose to receive funds via a:

  • Lump-sum payment
  • Tenure payment
  • Term payment
  • Line of credit
  • Combination of these methods9

Does a reverse mortgage affect Social Security or Medicare benefits?
Government entitlement programs like Social Security and Medicare typically remain unaffected by a reverse mortgage.10 However, it’s important to note that need-based programs such as Medicaid could potentially be impacted. Keep in mind that an additional source of cash flow, such as a reverse mortgage, may help you delay taking your Social Security benefits long enough to get the maximum amount. As always, it’s encouraged that you consult a qualified financial advisor or appropriate government agency to learn how a reverse mortgage may impact your eligibility for some government benefits.

With so many expenses to account for, healthcare costs can be quite daunting for retirees. But as noted, there are ways to plan ahead and mitigate these expenses. By taking proactive steps and prioritizing health maintenance, you can enjoy your golden years with confidence – while keeping your savings intact.

For more information on leveraging home equity to fund healthcare expenses and reshape your financial future, the Longbridge team of reverse mortgage professionals is here to help. Our team is committed to educating you about the reverse mortgage program to help you determine if the program is right for you and meets your needs. We’ll get to know you, your goals, and your finances as we discuss your options.

To see how much equity you may have available in your home or to learn more, contact us today.

1 A New Way to Calculate Retirement Health Care Costs (troweprice.com)
2 Fidelity® 2023 Retiree Health Care Cost Estimate
3 The biggest retirement expense you may not be ready for (ml.com)
4 CMS Office of the Actuary Releases 2021-2030 Projections of National Health Expenditures | CMS
5 Retirement planning: Health care costs in retirement (usatoday.com)
6 How to make sure your medical bills are right – Wellframe
7 How Much Should You Expect To Spend on Medical Expenses in Retirement? (cnbc.com)
8 As with any mortgage, you must meet your loan obligations, keeping current with property taxes, insurance, and maintenance.
9 Borrowers who elect a fixed rate loan will receive a single disbursement lump sum payment. Other payment options are available only for adjustable-rate mortgages.
10 Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits.

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