How to Budget for Healthcare Costs in Retirement

How to Budget for Healthcare Costs in Retirement

It’s fun to imagine a retirement filled with travel and leisure, and your retirement years could very well start out that way.  But later on in retirement, there’s an increasing possibility that you will need a significant amount of healthcare services.  You will also need to find a way to pay for them.

Medicare provides near universal health insurance coverage to people age 65 and older, but retirees still often face significant out-of-pocket costs.  Here’s how to budget for likely health care expenses in retirement:

         –  Prepare for premiums.  Most people don’t pay a premium for Part A hospital insurance.  The standard monthly premium for Medicare Part B medical insurance is $121.80 in 2016, which most people have withheld from their Social Security checks.  Retirees who earn more than $85,000 ($170,000 for couples) pay higher Part B premiums.

Medicare Part D prescription drug premiums vary based on the plan you select and are also larger for high-income retirees.  The covered medications, premiums and cost-sharing requirements for Part D plans change each year, so it’s a good idea to review your coverage and the other plan options each year.  During the annual enrollment period, “you get a chance to review what your medicine intake is, and then see if there is better coverage out there,” says Jean Setzfand, AARP’s vice president of financial security.

 –  Anticipate deductibles and co-insurance.  Medicare part B has a deductible of $166 in 2016, after which retirees must pay 20 percent of the Medicare-approved amount for many medical services.  There’s no annual limit on how much you might need to pay. While annual wellness visits and many preventative care services are free, you could incur additional costs if a problem is discovered.  for example, a colonoscopy is generally covered with no out-of-pocket costs, but if a polyp is removed during the procedure, you may have to pay 20 percent of the Medicare-approved amount to the doctor and a co-payment to the medical facility.

 –  Budget for what’s not covered.  Many medical services commonly used by older people are not covered by Medicare, including dentures, hearing aides and eye-glasses.  Extensive long-term care in a nursing home or assisted-living facility also won’t be reimbursed by Medicare.

 –  Consider supplemental coverage.  Medicare Advantage and Medigap plans cover many of traditional Medicare’s out-of-pocket costs and will sometimes cover additional services in exchange for a monthly premium.  “Most Medigap policies pick up the cost-sharing that beneficiaries would otherwise face if they didn’t have supplemental coverage,” says Juliette Cubanski, a Medicare policy analyst at the Kaiser Family Foundation.  “For a relatively high premium, you get the peace of mind that the Medigap policy will pay the out-of-pocket bills you incur as a Medicare beneficiary, rather than paying 20 percent for each service.”  Lower premiums are usually available with Medicare Advantage plans. 

 –  Avoid penalties.  If you don’t sign up for the various parts of Medicare on time, you could be charged higher premiums.  You can first sign up for Medicare Part B during a seven-month window that begins three months before your turn 65, after which your monthly Part B premium will increase by 10 percent for each 12-month period of delay.  retirees who remain employed after age 65 and are covered by a group health plan at work need to sign up within eight months of leaving the job or the health plan  to avoid the late enrollment penalty.  You can also incur a Medicare part D late-enrollment penalty if you go 63 or more days in a row without prescription drug coverage after qualifying for Medicare.  And there’s a six-month window beginning the month you turn 65 when you have a guaranteed right to buy any Medigap policy, after which you could be charged higher premiums or denied coverage.

 –  Save a large amount.  A 65-year-old couple retiring in 2016 is estimated to need $220,000 to pay for health care expenses throughout retirement, including typical out-of-pockets costs associated with Medicare Parts A, B, and D, according to an estimate from Fidelity Investments.  “You need $220,000, after tax, in a bank account or some sort of savings vehicle,” says Sunit Patel, a senior vice president at Fidelity.  The Employee Benefit Research Institute calculated that a 65-year-old couple with median prescription drug expenses would need $227,000 to have a 75 percent chance of being able to pay all their retirement medical bills, and a $283,000 to have a 90 percent chance.  People who don’t have a large enough nest egg to set aside a quarter of a million dollars specifically for retirement health care expenses are likely to spend a growing portion of their Social Security check,” says Dallas Salisbury, president of the Employee Benefit Research Institute.  “For the low- and moderate-income person, that can now be a very significant portion of your Social Security check.”  

-Authored by Emily Brandon. How to Budget For Healthcare Costs in Retirement, US News and World Report, 17 June 2014. Web, www.money.usnews.com

For more simplified and detailed explanations of Medicare Parts A, B, C and D, and other Medicare information, please read our earlier blog post entitled: 

“Confused About Medicare-Based Health Insurance Options?“ dated Thursday, March 17, 2016

We are happy to personally help you with any of your Medicare questions!  (800) 458-7805 and/or [email protected]