In poll after poll of persons in or approaching retirement, “how to handle healthcare costs,” or some form thereof, is consistently near the top of the list of chief concerns, often ranking higher than “running out of money” or “inflation.” But it makes sense; after all, the increasing cost of medical goods and services will typically have an increasing financial impact as we age and begin to experience the medical challenges that accompany aging. This, coupled with the persistent challenge of inflation, can easily combine to drain retirement savings reserves at a faster rate.
Our experience with clients bears this out. As we work with our clients to create a plan for retirement, we typically emphasize the importance of accurately forecasting the impact of healthcare costs. Even for those with excellent health, expenses for medications, appliances, and preventative measures to maintain a healthy lifestyle are going to go up, not down, as they get older. Hearing aids, orthotics, diagnostic tests, and other medical procedures and help can be expected to take up more, not less, of the budget as we age. The tab is likely to be higher for those with underlying health concerns.
What Does Health Care Cost in Retirement?
Each year, the Milliman Insurance Consulting group compiles a forecast of expected costs for medical expenses for those entering retirement. For 2024, the report indicates that a healthy 65-year-old couple entering retirement during the year can expect to need about $395,000 in savings to cover various healthcare costs during their retirement. This figure includes average premiums and out-of-pocket costs for original Medicare (Parts A and B), plus Supplement Plan G (covers most out-of-pocket costs for original Medicare) and standard Medicare Part D (prescription drug) coverage. The projections also assume that the male in the example lives to age 88 and the female lives to age 90. Remember, these are average costs, and they don’t necessarily all come at once. That $395,000 would average out to between $15-16,000 per year in premiums and out-of-pocket costs combined. For those going into retirement with known health challenges, expenses are likely to be greater. Also, if retirement is farther out for you, medical cost inflation means the amount you’re likely to spend during retirement is greater.
So, what can you do, if you’re building a financial strategy for retirement funding, to proactively take these costs into account? For most Americans, making smart choices about Medicare and the various Medicare supplements available is a big part of the answer.
What are all the parts of Medicare?
It’s important to remember some basics. Let’s do a quick review of the various components of Medicare and related coverages.
Basically, Medicare consists of four parts:
- Medicare Part A (“original Medicare”), which covers most hospital costs and is free for most enrollees;
- Medicare Part B, which covers outpatient costs, doctor visits, and most diagnostic tests, for which you will pay a monthly premium based on your income;
- Medicare Part C (“Medicare Advantage”), which is offered by private insurers subject to government oversight and can replace many of the benefits offered by Medicare Parts A, B, and (usually) D, in addition to other coverages not offered by Medicare;
- Medicare Part D, which covers your prescription drugs, for which you pay a monthly premium that varies by plan and is provided by private companies who are contracted through the government.
In addition to these aspects, you will also hear a lot about “Medigap” or Medicare supplement plans. These are offered by private insurers—not the government—and combine aspects of Parts A and B.
When do I sign up for Medicare?
Most should sign up for Medicare during their initial enrollment period, which begins three months before your 65th birthday and extends three months afterward. If you fail to sign up during this period, you could be subject to penalties later, when you do sign up. There is an exception to this rule for persons 65 or older who have “creditable coverage” that offers the same or better benefits than Medicare, usually from an employer with 20 or more employees or various government-sponsored plans (an option for those who choose to continue working after age 65). This consideration is especially important for persons with younger spouses who do not yet qualify for Medicare. If your spouse’s health insurance coverage is being provided through your employer, it may not be to your advantage to enroll in Medicare and drop your other coverage until your spouse qualifies either for Medicare or other coverage.
Should you consider Medicare Advantage or Medigap coverage instead of Medicare?
While of course the answer depends on your personal circumstances, in most cases if you are retired, the answer is yes. This is because traditional Medicare (parts A and B) may not cover 100% of your costs. For one thing, to obtain a Medigap plan, you must be enrolled in Medicare Parts A and B. Remember, Medigap is a program offered by private insurers, and though it must meet certain government-required standards, you will pay a monthly premium for the plan. What most Medigap plans offer in addition to Medicare is coverage of co-payments, deductibles, length-of-stay charges, and other out-of-pocket costs not covered by Medicare, which can easily add up to several thousand dollars per year, in some cases. Medigap typically does not cover prescription drug costs.
For any of the non-government plans above requiring a premium—Part C (Medicare Advantage), Part D, and Medigap—it is important for you to compare plans and benefits before you sign up (you don’t have a choice about your Part B premium; it is established by the government according to your income). You’ll also want to check with your primary care physician to make sure that they accept Medicare (93% of them do). If you are considering Medicare Advantage, you’ll also want to make sure your doctor is “in-network” for your particular plan; not all of them are.
What is your plan for covering health insurance costs in retirement?
Is there an aspect of Medicare or “Medigap” coverage that you wish you knew more about? Are you wondering if your spending plan for retirement is adequate for the healthcare costs you may be facing? Curio is here to help you find the answers you need. Please give us a call.
