How to plan for health care costs in retirement

Rhian Horgan, Silvur founder and author of "Medicare for Beginners: A Guide to Coverage and Costs", joined Yahoo Finance Live to discuss planning for health care costs in retirement.

Video transcript

SEANA SMITH: Welcome back to Yahoo Finance. As part of our retirement series brought to you by Fidelity Investments, we want to talk about planning for healthcare costs in retirement. So, for more on that, we want to bring in Rhian Horgan, a Silvur founder and author of Medicare for Beginners. Rhian, it's good to see you again.

So, just break this down for us because I think a lot of people associate Medicare with the fact that it is free. And that, like you point out, is definitely not true. So what do people need to know about planning for healthcare costs when they enter retirement?

RHIAN HORGAN: Well, I think the most important thing is really understanding that Medicare isn't free. Next week, we start enrollment season. And we're going to hear a lot of commercials advertising zero to low premiums. But the reality, Seana, is that there's a big difference between zero premium and zero cost. So when you think about a fully loaded Medicare plan that includes a prescription drug plan and a supplemental plan, it's not uncommon for a retiree to be paying $500 or more per month.

When you think about that in the context of your retirement, for a couple who's about 65 years old, that adds up to $300,000 over the course of retirement. So, one of the things that I think a lot about is, you know, the cost of healthcare and retirement really is a financial issue for the average American.

BRIAN CHEUNG: Hey, so one big misconception is that Medicare is free. And what's interesting is it's just kind of a confusion, I guess, between zero premium and zero cost. So can you just kind of delineate what the difference is? What should people be looking for in terms of even the nuances of the way that certain things are phrased within factoring in how much they should be saving for Medicare?

RHIAN HORGAN: Yeah. So the first part of Medicare to think about is there are multiple parts. And so part A is actually free, but part B has a $148 premium per month. On top of that, consumers then have to think about are they going to get a Medicare Advantage plan, which really pulls all of the cost together, or are they going to add on a drug plan, as well as adding on supplemental plan to add themselves with more protection?

So, when you think about what you're actually paying on a monthly basis, I really, again, think about the total cost. So think about total cost as being premium plus out of pockets, plus any deductibles, coinsurance. And all of that, you know, frankly, really quickly adds up, which is how I think about this kind of average $500 per month expense.

SEANA SMITH: One of the things that you pointed out in your note which I thought was interesting was health savings accounts for Medicare. And you were saying how giving your health savings account a second life, that that in retirement might actually work in your favor. How so, and what should people do?

RHIAN HORGAN: Yeah, so one of the things I think is a real misnomer in the market is kind of the difference between an HSA and an FSA. So I think many consumers are familiar with the FSA, which allows them to put money aside on a monthly basis to pay for expenses kind of earlier on in their life. But it is this use it or lose it account. The difference with an HSA is that that actual account can continue to grow. So, in many ways, it's like a 401(k).

So for consumers that have already maxed out their 401(k) and they're currently on a high deductible Medicare or a high deductible health insurance plan, they should really think about setting up an HSA, because that money can compound tax-free on an annual basis. And if that money is used for healthcare expenses in retirement, the actual withdrawal of the savings is also tax-free. So there's kind of a double win with an HSA that can be really powerful later on in retirement.

BRIAN CHEUNG: Are there any age implications to those things for anyone that's kind of not aware of whether or not it works like a 401(k), where if you kind of withdraw it from before a certain age, then there's certain implications from a tax standpoint?

RHIAN HORGAN: Yeah, so there are some implications that if you withdraw before the age of 59 and 1/2, that you don't get that double benefit of the free withdrawal. But I think, you know, for most consumers, what they're really thinking about is this as like an extra savings account that they can access for healthcare expenses. And I think that's where you really get that double win, is thinking about this as that long-term money that you really don't want to be topping. It's almost like the last account you touch if you're looking to withdraw money early.

SEANA SMITH: All right, well, our thanks so much to you, Rhian Horgan, Silvur founder and author of "Medicare for Beginners."