Healthcare Costs More for Retirees than You Think

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Healthcare costs during retirement can come as a shock for some, here is some of what you can expect and how to best plan.

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When saving for retirement people often think about the traveling they’ll do and the grandchildren they’ll play with.  What they don’t think about is the healthcare they’ll have to pay for.  What’s that you say?  You’ll just have Medicare? That’s great!  But a significant portion of your retirement savings is still going to go towards your healthcare costs.

Plan to Allocate 15% of Your Savings

People think Medicare covers everything, but it doesn’t.  In fact, according to the Kaiser Family Foundation, retirees who were on Medicare in 2018 spent three times as much of their budget on healthcare as working households did.  Why?  Well, just like any insurance, you have premiums, deductibles, co-pays and co-insurance and at the end of the day, Medicare might not cover your treatment.  According to Fidelity financial planners, a 65-year old couple today will need $285,000 in order to pay for their healthcare expenses.

If that seems like a lot (and it is) you should know that unless you’re nearing retirement age right now, you’ll likely need a lot more.  That’s because healthcare costs are rising on average faster than general inflation and wages.

Specific Medicare Costs

Medicare has four parts: A, B, C, and D.  Parts A and B act like traditional health insurance, covering doctor and hospital visits and treatments. Part C is what’s called Medicare Advantage and it’s a type of plan offered by private insurance companies that cover similar expenses as Parts A and B (so you would buy either Parts A and B, or Part C). Medicare Part D covers prescription drugs.

Not only are there four parts to Medicare, there are different rules for how you pay for each.

  • Medicare Part A: This part covers hospital stays.  As long as you were employed for at least 40 quarters and paid Medicare payroll taxes, you won’t pay a monthly premium for this health insurance coverage.  If you worked 30-39 quarters, paying into the Medicare payroll tax, then in 2019 you’d have to pay $240 in monthly premium.  If you worked less than 30 quarters you’d have to pay $437 in monthly premium in 2019.  This premium doesn’t include your deductible (which was $1,364 this year), or coinsurance ($341 for a stay of 61-90 days and $682 for a stay of 90+ days).
  • Medicare Part B: This part covers doctor visits and most outpatient procedures.  Everyone pays a premium for Medicare Part B and the premium you pay depends on your income.  The standard premium is $135.50, but if you make more than $84,999 per year as an individual, or $169,999 as a couple filing joint tax returns, you’ll have to pay at least $54.10 in addition to that $135.50.  The deductible for Medicare Part B was $185 in 2019.
  •  Medicare Part C: Since this is offered by private insurers, your cost for this type of plan will depend on where you live, your age, your health and the insurance provider.
  • Medicare Part D: The cost for Part D will also depend on your location and the coverage level you choose.  Part D has four tiers: generic, preferred, non-preferred and specialty.  The generic tier is the least expensive and the specialty tier the most expensive, so the plan you choose and the amount you pay will depend on your current or projected needs.  In 2019, the national average was $33.19 in monthly premium for Part D.

As you can see health insurance in retirement isn’t free (or cheap), even if you’ve paid for Medicare payroll taxes.  But as long as you plan for it and utilize tax-advantaged accounts like HSAs and 401(k)s to save and pay for healthcare expenses, you won’t have to choose between enjoying your golden years and paying for your healthcare needs.

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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.