Planning for Medical Expenses during Retirement
In a recent study conducted by Fidelity, it was estimated that a 65 year old couple retiring in 2019 could expect to spend $285,000 in health care costs and medical expenses throughout retirement. These expenses were broken down to $150,000 for women and $135,000 for men and would consume 9-14% of a typical older households’ spending. Included in these calculations are health insurance premiums, co-pays, deductibles and unreimbursed dental and vision charges. However, in another study conducted by Healthview Services, it was estimated that this number is closer to $390,000. Whatever the actual amount is, it is safe to say that the failure to plan for these expenses could derail the prospect for a comfortable retirement. On a positive note, these expenses are incurred annually and not in large lump sums. For instance, it is estimated that a typical 65 year old woman paid $3,300 - $7,700 annually for premiums and out of pocket medical, dental, and vision costs in 2018.
It should be noted that these figures do not include the potential costs of long term care protection. Many retirees mistakenly believe that Medicare pays for nursing home expenses but a maximum of 100 days is covered only if the stay is for rehabilitation.
One factor that affects the planning process is that many pre-retirees forget or do not know about the expense and choices for medical insurance at retirement. During their employment, employers generally pay a portion of the medical insurance premium with the employees share deducted from their paycheck. Not only do medical insurance options change at retirement (particularly at age 65 when you become eligible for Medicare) employees often forget they may become responsible for both the premium and out of pocket healthcare costs as well.
Pre-retirees also are under the misconception that Medicare is free and pays all medical expenses. While Medicare Part A, which covers hospitalization, is free, the insured is responsible to pay the premium from Medicare Part B as well as Part D if prescription drug coverage is desired. These premiums will vary greatly depending upon the individual’s income. Even with Medicare A and B, the retiree will likely require additional supplemental insurance since Medicare covers approximately 50-60% of total healthcare needs. It is imperative that Medigap insurance is purchased from a commercial health insurance carrier such as United Healthcare and Blue Cross/Blue Shield to provide coverage for medical expenses not covered under Medicare. Furthermore, most retirees do not have insurance for dental and vision care. It is estimated that nearly 2 out of 3 Medicare beneficiaries do not have dental coverage at a time when the need for extensive work often occurs.
According to Vanguard, there are 6 factors that will impact post retirement medical expenses:
- Retirement age – if you retire prior to Medicare eligibility at age 65, you will need to cover your own medical expenses
- Location – living in expensive areas with high medical costs such as Boston and New York City will result in larger medical expenses
- Health status – affects the need and costs of medications and/or expenses associated with ongoing care and possible hospitalization
- Income in retirement that affects how much you pay for Medicare Part B
- Medicare and Medigap choice (Medicare Part C or Medicare Parts A and B with supplemental coverage provided by commercial insurance)
- Amount (if any) employer subsidizes medical insurance premiums in retirement
Pre-retirement planning can make these expenses more manageable. For working people close to retirement, it would be wise to contribute to a Health Savings Account (HSA) if eligible. An individual can contribute $3,500 per year plus an additional $1,000 catch up if over age 55 to a tax deductible HSA. All medical expenses including Medicare and long term care premiums can be paid from an HSA tax free. While distributions from an HSA can be used at any time, it is generally far more advantageous to access this account in retirement when medical expenses tend to be higher and discretionary income lower. Unlike a flexible spending account (FSA), there is no time limit when an HSA account holder must make distributions.
Despite escalating medical expenses, studies have shown that retirees spend less discretionary income as they age. As a result, they are able to offset a portion of these rising expenses. Also, the majority of annual spending generally occurs during the last 12 months of life so the potential drain on assets is much lower during the early years of retirement. Furthermore, average Medicare spending is far less for “healthy” retirees. For example, a Medicare recipient with 0 or 1 chronic conditions will incur expenses just over $2,000 annually, but the amount more than doubles to nearly $5,700 for those with 2 – 3 chronic conditions.
In summary, when viewing aggregate medical expenses during retirement, planning for these expenses may appear to be daunting. By funding an HSA while working and monitoring and estimating medical insurance premiums at retirement, the ability to effectively manage these costs greatly increases.
Clifford L. Caplan, CFP®, AIF® Stephen Caplan
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