Why It's Difficult to Plan for Medical Expenses in Retirement (and What to Do About It) It would be super convenient if life was perfectly predictable. Weather forecasts would always be right. Investing in the stock market would be easy. And we wouldn't have to make...

It would be super convenient if life was perfectly predictable. Weather forecasts would always be right. Investing in the stock market would be easy. And we wouldn't have to make wild guesses about how much money we need in retirement.

For the most part, financial planning in retirement is a fixed, predictable model. Historical data and aggregated personal experiences lead us to reliable estimates like the 4% rule, which can help you make sure you never outlive your principal. And if you build your life around fixed expenses, you should be able to put together a consistent budget that can last you indefinitely. For example, if you pay off your house, you'll only be responsible for property taxes and insurance thereafter.

But there's one area of spending that's very difficult for retirees to comprehend and plan for, and it's only getting worse with time. Why are medical expenses so difficult to estimate for retirement? And what options do you have for solving this problem?

The Difficulty of Medical Expense Planning in Retirement

Let's break down the core reasons why it's so difficult to plan for medical expenses during your retirement.

Unpredictable Developments

First, we must accept that medical expenses are unpredictable because health is unpredictable. You may have led a perfectly healthy life for your first 65 years, but there's no telling what is lying in wait ahead of you. Despite doing all the right things and taking good care of your health, there's still a possibility you could develop a challenging chronic illness. And if you're in an accident, you could face a sudden onslaught of new medical needs and expenses. If you're retiring early, everything gets much more complicated, since you'll have more years to plan for and many more things can go wrong in that time.

Degradation of Health

Some people are able to age gracefully, but none of us can fully resist or fight back against the effects of aging. As we get older, our physical and mental health begin to decline, our capacity for healing diminishes, and we become less capable of rebounding from injuries and illnesses. Hopefully, you'll live for many years, or even decades past your initial retirement, but each year of your life is going to come with further degradation, more health issues, and more medical expenses that you'll face.

Changing Medical Environments

It doesn't help that medical environments are constantly changing. In many ways, these environments are changing for the better. For example, telehealth is becoming more common, with remote options for people who can't leave the home. But with a constant influx of new technologies, new tools, and new techniques, it's hard to say exactly how much certain medical services are going to cost in the future. Better and more sophisticated medical treatments can prolong your life and improve your quality of life, but they can also be much more expensive.

Rising Prices

Politicians like to argue about the root causes of healthcare cost increases, but one thing is certain: healthcare and medical costs consistently rise. Development of new technologies, better and more sophisticated healthcare facilities, unnecessarily restrictive government regulations, and profit motives from insurance companies are just a handful of factors pushing prices higher. How is the average consumer supposed to accommodate these price increases or predict them with accuracy?

Confusing Policies

The average person doesn't fully understand their medical insurance coverage. Even assuming they understand basic insurance terminology and concepts like copays, it may still be difficult to figure out exactly what your insurance policy will cover and what it won't.

Now that we better understand the problem, let's turn our attention to actionable advice. What can you do about this?

Controlling the Variables

There are some things that are totally out of your control. You don't have much influence (if any) in how the government regulates the medical industry, nor will your insurance company cut your premiums just because you ask nicely.

But there are some things that are perfectly in your control, and they can help you estimate your medical expenses accurately

Review multiple sources and estimate conservatively.

First, review multiple sources and try to estimate your medical expenses as conservatively as possible. People have a tendency to grossly underestimate how much they're going to spend on healthcare in retirement. For example, surveyed respondents believe that they'll need to spend about $2,700 per year, per person on medical expenses after age 65, but the true costs are somewhere closer to $5,700 per year, per person.

This is a nice estimate to start from, but it's still only one source; it's a good idea to review many different independent sources and aggregate the data so you have a better understanding of what you might face in the future. Even then, plan on spending more than you initially think you will; this builds a kind of buffer into your financial strategy, allowing you to accommodate unexpected price increases.

Work to understand your policies in full.

Don't let yourself be yet another consumer who passively taps into a health insurance policy without fully understanding it. Whether you're on Medicare or a private insurance policy, take the time to read those policies and talk to your agent so that you can fully understand how they work. If there are terms you don't understand, look them up. If you're confused about whether a provider is in network, ask. This should help you better ballpark the costs for the services you think you'll need.

Explore all your options.

Next, always explore all your options. There may be more forms of health care and support than you initially realize. For example, did you know that you may be able to use your Medicare benefits to pay a friend to become your home care provider? Or that visiting an urgent care facility is usually much cheaper than going to the emergency room?

Understand your history and personal risk factors.

It's also a good idea to take a look at your medical history and examine your personal risk factors. A doctor can help you do this as well. If you have a family history of a certain chronic disease or if there's a common health problem faced by older members of your family, you should be aware of those. This awareness can help you prepare accordingly.

Planning Early

Medical expenses are much easier to accommodate if you plan for your retirement early and focus on building the most robust financial foundation for yourself as possible.

Don't rely exclusively on insurance or medical programs.

Medicare helps millions of retirees cover their medical expenses in retirement, and if you have a private insurance policy, you may get even more coverage. However, it's important not to rely exclusively on your insurance or medical programs. No matter what, you'll still be responsible for premiums, copays, and other expenses. It's important to have plenty of extra money set aside for your needs.

Build a robust nest egg.

Ideally, you'll have a massive nest egg for retirement, capable of generating income for you every year while simultaneously allowing you to make emergency withdrawals as necessary. The target value of your nest egg will vary depending on your lifestyle, your geographic location, and other factors.

Take advantage of HSAs.

Health savings accounts (HSAs) are tax advantaged savings accounts that make it easier for people to save for healthcare and medical expenses. These aren't the right financial products for everyone, but if you're looking for a new way to save for long-term medical expenses in a way that directly benefits you, they're certainly worth considering.

Take care of your physical health.

Prioritizing your health is a smart financial move in addition to being a smart health move. If you take good care of yourself, you'll be far less likely to experience expensive medical events and your total costs will decrease. Consider cutting out harmful substances, drinking more water, eating a healthy mix of different foods, staying physically active, and socializing.

Prioritize preventative care.

Similarly, preventative care is usually much less expensive than other forms of care. Attend all your regular appointments, undergo any screenings recommended by your doctor, and if you notice any health issues, try to take care of them quickly and upfront, rather than allowing them to worsen. This approach is more than just inexpensive — it's better for your health.

Create backup plans.

It's also important to have some backup plans in place. If Medicare doesn't cover an expense, what will you do? If a medical bill greatly exceeds your monthly allowance, how will you make it work? What if your annual medical costs are twice what you initially predicted?

In retirement, it's important to have a solid financial plan in place for all your other expenses.

Live below your means.

Yes, retirement is a time for relaxing and indulging in all the things you wanted when you were younger. But it's also a good idea to continue living below your means, even if you've already done this for decades. Cutting your expenses by even a few hundred dollars per month can give you a financial buffer that can help you get through most unexpected financial developments.

Prepare to cut other expenses.

If you find yourself in a tough spot, needing more medical attention, you need to be prepared to cut the other expenses in your life. For example, is it possible for you to move to a smaller and more affordable house? What special products and services could you live without?

Establish possibilities for revenue.

If you're still in relatively good health, it's also not a bad idea to establish possibilities for revenue generation, should you need it in the future. For example, could you invest in a rental property that generates passive monthly income? Could you get a part-time job at a nearby business? Are there any side gigs that allow you to showcase your skills and talents while generating new income regularly?

What to Do If You're Overwhelmed

You've done the planning. You've done the preparation. But even your best estimates have failed you; your medical expenses in retirement are much higher than you anticipated.

What can you do?

Check the charges.

Whenever you receive a medical bill, you should take a close look at the charges. There's always a chance that you were overcharged for something or that you were charged for a service you never even used. If you have any questions, ask to verify them, and if you're lucky, some of them may be removed or discounted.

Ask for discounts.

Don't be afraid to ask for discounts, especially if your insurance doesn't cover something or if you were counting on your insurance to cover more than it did. Many healthcare facilities are willing to extend discounts to people without the financial means to cover their bills.

Negotiate a payment plan.

Many retirees don't realize it's possible to negotiate your medical bills — at least in some cases. Asking for discounts is a good place to start, but if that doesn't work, see if you can figure out a payment plan that works for everyone involved.

Apply for financial assistance.

Depending on your financial situation, you may also qualify for financial assistance. Ask about any special programs that might be a good fit for you.

Consider a loan.

It's usually a bad idea to max out credit cards when paying down medical debt, since credit card interest rates are so obscenely high. But in some cases, a low interest rate loan could be exactly what you need to close the gap.

Unfortunately, there's no surefire formula or approach that can help you reliably estimate your medical expenses with pinpoint accuracy. Since there are so many open variables and changes on the horizon, all you can do is focus on the information you have, plan with uncertainty in mind, and be adaptable enough to change your financial plans if and when appropriate.

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