Becoming eligible for Medicare when you turn 65 is a significant financial milestone. If you’re self-employed, this means no more paying colossal health insurance premiums, and most of your health care costs are covered. The operative word in the last sentence is “most.” While Medicare is a great program, there are some significant gaps in the coverage that can blindside retirees who haven’t planned for them.
Health Care Costs in Retirement are High, and They’re Going Higher
When all costs are considered, including Medicare premiums, deductibles, copayments, and uncovered costs, the average 65-year-old couple will pay an average of $295,000 out-of-pocket in health care costs over their lifetime.[i] That can be a significant portion of the retirement income pie. The average annual healthcare costs for people who reach 65 are $11,300 per year.[ii]
Historically, medical costs across the board have increased faster than inflation due to rising demand. However, due to the massive influx of people becoming Medicare-eligible, the demand for services is at its highest, putting even more upward pressure on medical costs. What started as an average $11,300 per year average cost can increase substantially over 20 years. However, with some proper planning, most people can prepare for rising health care costs in retirement.
What’s Not Covered by Medicare?
Medicare Part A and Part B also referred to as Original Medicare, will cover a significant portion of your medical expenses once you turn age 65. Part A is your hospital coverage, helping pay for inpatient hospital stays, surgery, hospice care, and skilled nursing facility stays. Part B is your medical insurance, helping to cover the costs of doctor’s visits, outpatient services, some preventative services, and some medical equipment and supplies. Part A is free, while Part B costs $148.50 per month. The Part B premium can increase for higher earners.[iii]
Here are the common medical expenses not covered by Medicare:[iv]
Copayments and deductibles. For Parts A and B, you are responsible for copayments and deductibles. The deductible for Part A is $1,484 in 2021. For Part B, it’s $203. As far as copayments, you generally are responsible for 20 percent of the cost of doctor services, outpatient costs, and medical equipment.
Prescription drugs. Original Medicare doesn’t cover the cost of outpatient prescription drugs. However, you can buy a separate Part D specifically to cover the expenses. The average Part D premium in 2021 is $33.[v]
Dental care, vision care, or hearing aids. Medicare doesn’t cover dental or vision care. Nor does it cover hearing aids. You can purchase coverage separately or add it through a supplemental Medicare plan (discussed below).
Long-term care. For many retirees, their most significant expense is the cost of long-term care. While Medicare does cover some skilled nursing services, it does not cover custodial care. Coverage for custodial care can be purchased separately with a long-term care policy. Or you can check to see if your life insurance policy offers living benefits.
Covering the Gaps in Medicare Coverage
One way to manage your out-of-pocket health care expenses is by purchasing a Medigap policy. With a Medigap policy, you can have little or no out-of-pocket costs. When you are billed for medical services, Medicare covers what it can then passes the bill on to Medigap to pay a portion of the rest. Average Medigap premiums range anywhere from $50 to $350 per month, depending on coverage desired, your age, and your health history.[vi] Some people may not qualify for coverage. Medigap doesn’t cover dental, vision, or hearing aids, and you will still need Part D to cover your prescription costs.[vii]
Alternatively, you can shop the private insurance market for a Medicare Advantage plan. Medicare Advantage plans are network-oriented health plans with varying levels of out-of-pocket costs. Also, Medicare Advantage plans may only provide coverage for in-network services. Though you are responsible for a deductible and some copays, there is an annual cap on out-of-pocket costs. Some Medicare Advantage plans offer dental, vision, and hearing aid coverage. Premiums range from $0 to more than $100 per month, depending on the plan. All enrollees pay the same premium regardless of age or health. [viii]
Build Up Tax-Free Savings to Cover Gaps
There are steps you can take before retirement, such as increasing contributions to your Roth IRA, 401(k), or a health savings account to build a bigger health care cushion. Both plans allow for tax-free withdrawals, which is important because they won’t be included in your Social Security tax calculation or count towards your Medicare Part B premium calculation.
The ideal tax-free account to save for health care costs is a Health Savings Account (HSA). With an HSA, your contributions are pre-tax, your account earnings are tax-free, and your withdrawals are tax-free if used to pay for medical costs. You need to pair an HSA with a high-deductible insurance plan, and you can’t participate in another health insurance plan.
If that’s not an option for you, you could start contributing to a Roth IRA. Your contributions are after-tax, but your earnings and withdrawals are tax-free.
Stay Healthy
One of the surest ways to control your health care costs is by maintaining your health. Your lifestyle choices and habits have a more significant impact on your health as you age. Eating right, exercising, staying socially active, and regular preventative care can help keep your health care costs in check.
Work with an Advisor Who Works Medicare into Your Retirement Plan
Medicare is an important part of the foundation of your retirement plan. Being properly equipped to cover your medical expenses can potentially save you thousands of dollars each year over the course of your retirement.
At URS Advisory, we understand how much Medicare will affect your retirement budget and pride ourselves on helping you work these expenses into your planning process. Each year, we also help you review your plans to make sure you aren’t overpaying in premiums.
If you’d like to learn more about our comprehensive retirement planning services, we invite you to schedule a complimentary conversation with us. We would love to get to know you and see if our advisory firm would be a good fit.
[i] https://money.usnews.com/money/retirement/aging/articles/preparing-for-medical-expenses-in-retirement 9 September 2021
[ii] https://www.registerednursing.org/articles/healthcare-costs-by-age/ 9 September 2021
[iii] https://www.medicare.gov/basics/get-started-with-medicare/sign-up/when-can-i-sign-up-for-medicare 9 September 2021
[iv] https://www.medicare.gov/what-medicare-covers/whats-not-covered-by-part-a-part-b 9 September 2021
[v] https://www.healthcarefinancenews.com/news/medicare-part-d-average-premiums-increase-nearly-5-2022-cms-says 9 September 2021
[vi] https://www.ehealthinsurance.com/medicare/supplement-all/how-much-medicare-supplement-plans-cost 9 September 2021
[vii] Ibid.
[viii] https://www.medicare.gov/Pubs/pdf/12026-Understanding-Medicare-Advantage-Plans.pdf 9 September 2021