What Should You Expect to Pay for Healthcare During Retirement?

What Should You Expect to Pay for Healthcare During Retirement?

One of the biggest fears as people approach retirement is running out of money. To avoid this, you need to think critically about the money you will need to cover your expenses—and one expense that is often underestimated is healthcare.

Payroll taxes go toward Medicare and you’ll become eligible for this insurance at the age of 65, but you will still need to pay premiums. Moreover, Medicare does not cover all expenses, so it is very important to know what to expect when it comes to managing your health and dealing with illness, especially if long-term care may be necessary. According to a recent report, out-of-pocket healthcare costs in retirement can easily hit the six-figure mark.

The study showed that men will likely need about $130,000 to cover premiums and prescriptions in retirement. For women, this figure jumps to $146,000. Medicare only covers about two-thirds of the cost of healthcare services, which is why this number can climb so high. In the future, these costs could increase even more, depending on how long the economic effects of the coronavirus pandemic persist.

Already, an initiative has started in Congress to keep Medicare Part B costs down. This plan covers outpatient care and comes with a monthly premium of $144.60 for 2020. The HEALS Act would maintain this premium for another year. However, this premium is based on income, and it could be more for high earners. 

Breaking Down the Different Parts of Medicare Plans

Understanding the different parts of Medicare, as well as their costs and coverages, is key to estimating your healthcare expenses in retirement.

Medicare Part A covers hospital stays and is free for anyone who has at least a 10-year work history of paying into Medicare. However, Part A still has a deductible of $1,408 per benefit period in 2020 and caps on its coverage. Part B, which covers outpatient care as described above, has a $198 deductible per benefit period. Once that amount is met, you’ll continue to pay for 20 percent of covered services out of pocket. Importantly, neither of these plans cover prescriptions. That’s where Part D comes into the picture.

The premium for Part D depends on your plan and earnings, but the maximum deductible is currently set at $435. You only pay for the plan if you’re earning more than $87,000 annually as an individual or $174,000 as a couple. Importantly, the government uses tax returns from the two years prior to determine premiums, so that would currently mean looking at your 2018 return. For this reason, you may end up paying higher premiums in your first two years of retirement. You can fill out a form through the Social Security Administration to request a deduction based on life-changing events, which includes retirement, but these forms can take time to get approval.

There’s Medicare Part A, Part B, and Part D—what about Part C? According to the current Medicare structure, Part C includes various Advantage Plans, which are sold by private insurance companies and meant to cover some of the gaps in Parts A and B. Most Part C plans come with prescription coverage, so you may not need a Part D plan if you go this route.

However, the Advantage Plans have their own copays, out-of-pocket maximums, and deductibles, so it is very important to consider the cost and coverage provided by each option before making a decision. For people who purchase an Advantage Plan, their Parts A and B benefits are covered by the insurer who provides the Advantage Plan, so expenses connected to the former plans could also be affected.

Planning for Personal Healthcare Needs in Retirement

Prior to making decisions about your healthcare in retirement, you should also know about Medigap, which is sometimes referred to as Plan G. A Medigap plan helps pay for the out-of-pocket costs associated with Medicare, including both coinsurance and deductibles. Medigap plans cannot be purchased if you already have an Advantage Plan, so you should figure out which, if either, better serves your needs and goals.

Research by the Kaiser Family Foundation found that nearly 30 percent of people who have only basic Medicare struggle to pay medical bills or forego care because of the cost, especially because the basic plan has no out-of-pocket cap on spending. This issue makes it difficult to plan for costs.

A significant benefit of the Advantage Plans or Medigap is that you’ll know the financial cap and can plan based on that number. Plus, these plans often provide additional coverage that you will likely need, such as dental, vision, and hearing care.

You may also want to consider long-term care needs, as well as overseas coverage. The supplemental plans often come with these benefits or allow you to add them for a lower cost than buying a completely separate plan. Some of the supplemental plans may even provide coverage for some cosmetic procedures.

It’s important to remember that there’s no one-size-fits all number that everyone should expect to pay for healthcare in retirement. Think critically about what kind of care you will likely need during retirement, especially if you already have chronic health issues. Understanding your needs will help you choose the best option and plan accurately for the costs you’ll face.