Data from the Employee Benefit Research Institute found that retirees may need hundreds of thousands of dollars more than planned to cover their post-retirement health care costs.
This figure takes into account Medicare, the U.S. federal health insurance program for people 65 and older. Medicare covers many services, but experts say retirees often underestimate how much they’ll pay over the long term.
A 65-year-old couple could need about $405,000 to cover their medical expenses in retirement, based on a scenario that assumes a 90% chance of covering medical expenses and reflects typical Medicare coverage options, according to a March analysis from EBRI.
This estimate reflects how much retirees need to save to cover insurance premiums, out-of-pocket costs, and prescription drug expenses in retirement, costs that tend to increase as people get older and need more care. In a scenario where prescription drug costs are particularly high, the total could reach $469,000, EBRI found.
When it comes to unexpected expenses, “What most people don’t understand is that when you get sick (usually after retirement), you can end up paying a lot of money out of pocket,” says Carolyn McClanahan, a physician and certified financial planner in Jacksonville, Florida. “Nobody thinks about it until it’s in their notebook.”
What Medicare Covers and What It Doesn’t Cover
Medicare is made up of several parts that cover hospital care, outpatient services, and prescription drugs. Some people add supplemental coverage known as Medigap, while others choose a Medicare Advantage plan instead.
Medicare Advantage plans offered by private insurance companies often have lower monthly premiums, but require you to pay for care if you need it and usually have a limited network of providers.
No matter which plan you choose, Medicare won’t eliminate your costs. According to Medicare.gov, most beneficiaries pay a monthly premium of about $202 for Part B, which covers health insurance, as well as an annual deductible of about $283 and coinsurance, typically 20%, for many services.
Additional coverage, such as prescription drug plans and supplemental insurance, can add about $100 to more than $300 per month, depending on the plan. Even with that coverage, unlike Medicare Advantage and many private insurance plans, traditional Medicare has no annual out-of-pocket maximum.
Retirement health care costs typically exceed Medicare premiums and deductibles. Based on the most recent data available in 2022, Medicare beneficiaries spend about $6,330 a year on health care costs, including insurance premiums and out-of-pocket costs for services not fully covered by Medicare, such as medical and dental care and long-term care, according to the Kaiser Family Foundation.
EBRI’s estimates are based on simulations of various life expectancies, investment returns, and health care utilization, and the results show how much retirees need to save at age 65 to have a given chance of covering their health care costs. The diagram below compares two common coverage scenarios for couples.
Traditional Medicare with Medigap:
Approximately $267,000 with a 50% chance of covering costs Approximately $405,000 with a 90% chance
Medicare benefits:
50% chance of about $135,000 90% chance of about $203,000
McClanahan said Medicare Advantage plans offer lower expected costs, but they also come with tradeoffs. These plans often have more limited provider networks and may require underwriting if you later switch back to traditional Medicare with additional coverage, she says, meaning coverage can be more expensive or harder to obtain.
How to plan for medical expenses after retirement
Considering Medicare’s out-of-pocket costs, planning for your health care costs in retirement starts with understanding what Medicare will and won’t cover.
Many people focus on the monthly premium, but that’s just the starting point. McClanahan says out-of-pocket costs tend to increase later in retirement, when people may need more care and have fewer options to change insurance.
To illustrate this, McClanahan says his clients’ financial plans typically include an annual cushion (approximately $5,000 to $15,000) for unexpected expenses, with unused amounts carried forward, but cash flow assumptions are updated annually.
“Health care spending is not static; it comes in waves,” says Jim Shagawat, a certified financial planner in New Jersey. “You could have a few low-cost years followed by $50,000 years.”
Mr. Shagawat said many clients keep one to two years worth of anticipated medical expenses as a cushion in more stable assets. After a high-cost year, that reserve is typically replenished over time, such as by rebalancing the portfolio or directing dividends and interest to cash, rather than being rebuilt all at once, he said.
Another approach, Shagawat says, is to set aside a certain amount each year and let the unspent funds build up over time to prepare for larger expenses in retirement.
In any case, “the goal is not to predict exact expenses, but rather to ensure that medical costs don’t disrupt your overall retirement planning,” he says.
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