Health Care Costs in Retirement
By Ashlyn Brooks | Originally posted on USA Today
Key points
The average couple may need $315,000 to cover health care costs in retirement.
Medicare can help cover health care costs in retirement, but it won’t cover everything.
Keep an eye on your retirement plan and adjust it as needed.
Retirement: a facet of life people dream about. But that vision of never-ending piña coladas on a beach is fading, or at least being delayed, because of the steady increase in the cost of life’s necessities.
Health care is one such necessity for retirees. According to the Fidelity Retiree Health Care Cost Estimate, the average retired couple age 65 will need around $315,000 to cover health care expenses during retirement. That doesn’t include housing, bills, food or other costs. So you can see why this topic might cause serious sticker shock.
But there are ways to plan ahead and mitigate these expenses. Whether through careful financial planning, taking advantage of Medicare benefits or exploring other health care options, you can protect your retirement savings and peace of mind.
Rising health care costs are a big issue
For many Americans, saving hundreds of thousands of dollars for retirement isn’t a luxury. It’s a necessity.
As if saving for retirement wasn’t hard enough, consumer goods and services prices have now surpassed medical care costs. Historically, the opposite was true. But that doesn’t change the fact that “health insurance and various medical-related expenses are expected to increase dramatically after retirement,” says Lyle Solomon, an attorney at Oak View Law Group.
Health care costs are predicted to increase by an average of 5.1% per year, reaching $6.8 trillion by 2030, according to the Centers for Medicare and Medicaid Services.
Costs for the average American retiree couple break down as follows, according to Fidelity Benefits Consulting:
17%: Generic, branded and specialty drugs.
39%: Medicare Part B and Part D premiums (for doctor appointments and prescription drug coverage).
44%: Other medical expenses (such as copays, coinsurance, and deductibles for doctor and hospital visits).
“These costs are based on the assumption that the couple is eligible for Original Medicare (Medicare Parts A and B) and does not have an employer-sponsored retiree health plan,” Solomon says. “You might invest less than $300,000, but you could also spend a lot more.”
5 steps to mitigate health care costs in retirement
Handling the high costs of health care in retirement takes preparation and discipline. Financial experts versed in health care costs advise taking the following five steps to cover costs.
1. Know your cost targets
Job one for retirees and preretirees is to know what you’re up against costwise.
Basically, there are three areas of health care costs you need to cover: health care premiums, out-of-pocket expenses and long-term care.
Premiums: Your policy’s premium, which is the amount you pay monthly for coverage, will be a major factor in your health care costs in retirement. For context, Medicare Part A may have zero premium, but Part B’s premium depends on your income.
Out-of-pocket expenses: This is the total amount of money a health care consumer pays on their own. Your insurance plan may include an annual out–of-pocket maximum for covered health care services. But you’d be on your own for any uncovered expenses.
Long-term care: Long-term care can account for a huge chunk of overall retirement health care costs (and it’s important to note that the $315,000 figure mentioned above doesn’t account for long-term care). This kind of care includes nursing home stays and in-home nursing with a medical attendant. According to SeniorLiving.org, the annual cost for a private nursing home room in 2023 is $108,405. If you don’t have a plan for these costs, they can easily throw a wrench into your retirement spending plan.
People who retire before they reach Medicare eligibility (65 in most cases) often worry about their health care premiums.
“If you choose a lower-premium plan, you are effectively gambling that you are going to stay healthy,” says Jay Zigmont, a certified financial planner and the founder of Mississippi-based Childfree Wealth, a financial planning firm. “Lower premiums come with higher out-of-pocket costs and maximums.”