Ron Carson, Contributor
Oct. 12, 2021
The month of October is known for a lot of things, shorter days, cooler temperatures, falling leaves and the arrival of pumpkin spice everything—from baked goods to coffee, yogurt, smoothies, beer—and yes, even pumpkin spice turkey. It also marks the start of Medicare’s annual open enrollment period, which begins on October 7 and ends on December 15, 2021.
Why is the start of open enrollment important? Even if you’re years away from eligibility, understanding what Medicare does and does not cover is essential for anyone saving for retirement. To find out why, grab a cup or a bite of your favorite pumpkin spice concoction, and read on.
More than 63 million Americans currently receive healthcare benefits under Medicare, the federal health insurance program for Americans age 65 and older and younger people with certain conditions and disabilities. Yet, traditional Medicare only covers a portion of your healthcare expenses. What it doesn’t cover can put a real dent in your income in retirement. That’s because healthcare costs remain one of the largest expenses most people face in retirement. In fact, one study suggests that the average couple retiring at age 65 in 2021 will need approximately $300,000 saved (after tax) just to cover healthcare expenses in retirement.
The problem is, you’re not average. Your costs could easily fall below or well above that amount. So, how can you plan ahead for healthcare costs in retirement? The first step is to understand what Medicare does and doesn’t cover.
Out-of-pocket costs can add up fast
Traditional or “original” Medicare includes Medicare Part A (hospital insurance) and Part B (medical insurance). Most people do not pay a premium for Part A, but there are deductibles and limits to what is covered. Many covered services are subject to cost sharing, which means Medicare will pay for the approved amount charged by a medical provider, and you are responsible for paying the remainder.
What’s more, there is there is no out-of-pocket maximum, which can get expensive if you have or develop one or more chronic medical conditions in retirement. In Part B, you pay a monthly premium and a deductible, but again, there is a limit to what Medicare covers. However, there is no limit to the out-of-pocket maximum you might pay. In addition, certain services may not be covered at all, or are only partially covered. This list can change each year, so it’s up to your and your medical providers to keep on top of what is or isn’t covered from one year to the next.
Some services that are not covered under traditional Medicare include prescription drugs, dental, hearing and vision services, and long-term care—all of which can be problematic when it comes to managing expenses in retirement. In fact, a recent survey found that 23% of adults age 65+ with Medicare coverage still had difficulty affording their prescription medications. To receive prescription drug coverage, you can join a separate plan to get Medicare drug coverage ( Part D ). Another option is to join a Medicare Advantage or “Medi-Gap” Plan.
Medicare Advantage Plans are offered by Medicare-approved private companies that must follow rules set by Medicare. Most Medicare Advantage Plans include prescription drug coverage, and some include varying levels of hearing, vision and/or dental coverage. Plans may require you to use healthcare providers who participate in the plan’s network and service area for the lowest costs. These plans set a limit on what you’ll have to pay out-of-pocket each year for covered services, to help protect you from unexpected costs. While some offer out-of-network coverage, this usually comes at a higher cost.
The long-term care conundrum
One of the largest expenses retirees may face during their lifetimes is paying for long-term care, which is not covered by Medicare. According to the U.S. Department of Health and Human Services, someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and supports during their lifetime, with 20% needing it for 5 years or more. In addition, women may need care longer (3.7 years) than men (2.2 years) due to their longer average lifespans.
Long-term care costs not only add up quickly but continue to rise year-over-year. According to an annual cost-of-care study, from 2004 to 2020, the average cost for facility and in-home care services has risen, on average, from 1.88% to 3.80% per year. That’s an increase of $797 annually for home care and up to $2,542 annually for a private room in a nursing home, which costs, on average, $105,850 per year. In comparison, the yearly cost of the average assisted living facility is $51,600 per year and annual costs for home health aides has risen to $54, 912 annually.
Now think about what would happen if one partner required nursing home care for a period of three years before reaching the end of their life. Based on today’s estimates, that could add up to $306,000 or more. That doesn’t account for any Medicare Part B or D, or Medicare Advantage Plan monthly premiums or other out-of-pocket medical expenses the couple pays on an ongoing basis. As a result, the added expense of nursing home care would put the couple well above the estimated $300,000 lifetime out-of-pocket healthcare costs mentioned earlier in this article. It also raises another important concern: What happens when one partner requires more care than the other? Will enough money be left to pay for the remaining spouse’s healthcare needs for the remainder of their life? What if they require long-term care as well?
These are tough questions to think about, let alone answer. That’s why planning for healthcare costs in retirement needs to take place sooner than later. But where do you begin? And how do you anticipate your healthcare needs 10, 20 or 30 years from now?
That’s where planning comes in. By working closely with an independent financial advisor, you can explore ways to save more now through tax-smart savings vehicles such as your employer’s retirement plan or an individual retirement account (IRA). If you’re age 50 or older, be sure to take advantage of catch-up contributions. If you currently have a high-deductible health care plan, your employer may offer a Health Savings Account (HSA). This type of account allows you to contribute while receiving a tax deduction. Account earnings grow tax-deferred within an HSA, so if the money is eventually used for qualified medical expenses the withdrawal is tax-free. In 2021 the IRS allows individuals to contribute $3,600 and families to contribute $7,200 to HSAs.
Your advisor can also help you determine if long-term care insurance is the right solution for you. Keep in mind, the younger you are when you purchase a policy, the potentially lower the premiums. So if you think this may be an option for you, don’t wait to discuss your concerns with your advisor.
Whether you’re nearing retirement or already retired, your advisor can help you plan for healthcare costs, using sophisticated financial planning software. The software runs thousands of potential scenarios to help identify potential risks while determining the likelihood of accomplishing each of your goals, including how you will pay for healthcare costs in retirement.
While there’s no crystal ball for predicting what lies ahead, we know from recent events that circumstances impacting our health and well-being can change quickly with little warning. Taking steps now to prepare for the future can not only help to head off surprises but pave the way toward a more confident tomorrow.
To learn more about planning for healthcare expenses in retirement, download our free guide to Managing Long-Term Care in Retirement . And if you have questions about whether an HSA is right for you, download our complimentary Health Savings Account Worksheet.
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