Managing Health Care Costs in Retirement

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April 30 2019

As more than 10,000 baby boomers a day being their next act, many are realizing that it’s not their father’s retirement anymore. Retirees today are confronted with new challenges, including expanding life spans and rising health care costs, which must be accounted for in the planning process. Studies have revealed that total medical costs for a 65-year old couple retiring today can exceed $285,000, including copayments, premiums, deductibles, prescription drugs, vision, and dental care and other expenses not covered by Medicare. Then there are long-term care expenses, which impact seven out of ten seniors, that can run between $45,000 and $100,000 a year.

Accounting for longevity and health care costs adds a layer of complexity to retirement planning not encountered by prior generations. While there is no way to project your actual health care costs in retirement, you can at least make some assumptions based on your current health condition, family history, lifestyle choices and your ability to maintain good physical and mental health. It makes sense that, if you are in tip-top shape at age 65, you will likely have lower health care costs than someone who has diabetes or cardiac disease. However, due to your longevity, you may be looking at more years of long-term care. The best you can expect is to have enough money set aside to cover likely out-of-pocket costs, while proactively managing your health care coverage in retirement.

Making 80 the New 60 is Key to Managing Health Care Costs

The most important factor in managing your health care costs is your personal health. Finding ways to exercise your mind and body and eating healthy is essential to controlling your health care costs. Seniors who lead a healthy and active lifestyle can slow the aging clock and stave off illnesses while preventing injuries. With health care costs potentially consuming an increasing portion of your budget in retirement, maintaining your good health could be the best investment you make.

Making Medicare Work for You

Central to your health care cost management is your Medicare plan. While it’s easy to sign up for Medicare, understanding the different components – there are four parts to Medicare – and how they work together to produce the optimum outcome for you can be a little more complicated. It’s easier when you have a clear idea of your health care needs as you explore your options.

Medicare Part A is fairly straightforward. It’s free and it covers nearly all the costs of hospital care.

In 2019 you pay a deductible of $1,364 and, if you require an extended stay, there is a $341 daily co-pay after 60 days and a $682 daily co-pay beyond 90 days. Medicare will also cover a skilled nursing facility for up to 20 days, after which you are charged a co-pay of $170.50 for a total of 100 days of coverage.

Medicare Part B is optional coverage and there is a premium charge. However, it’s important coverage because it includes doctor visits and outpatient treatment, including both medically necessary and preventative services. You can obtain coverage for these services from a private insurance company, but, once you opt out of it, there is a penalty for late enrollment if you change your mind. In 2019, the standard monthly premium for Part B is $135 if your taxable income is less than or equal to $85,000. If your income is higher than $85,000, your premium can range from $189.60 to as high as $460.50 for incomes over $500,000. The best part of Medicare Part B is the annual deductible is just $185 for all beneficiaries.

Medicare Part C is completely optional but, depending on your circumstances, it can save you some money. Often referred to a Medicare Advantage Plan (MAP), it combines Parts A, B, and D under one plan. It also covers many of the co-pays for Part B coverage. Premiums can range from $0 (but watch out for higher co-pays) and $300 depending on what’s included in your plan and whether it is with an HMO or PPO. On average the premiums for Medicare Advantage are lower than what you would pay for Parts B and D separately. The advantage of Medicare Advantage is it can reduce your overall costs while making it easier to manage all your coverages. Also, Medicare Advantage Plans are offered by private insurers, so it pays to shop and compare.

Medicare Part D covers prescription drugs and the premium can vary based on the plan you choose and where you live. Some plans cover a wider range of prescription drugs than others. In 2019, the average Part D premium is $33.19.

 When combined, your basic Medicare costs can range from $3,000 to $4,000, including deductibles. But that doesn’t include other medical expenses, such as vision care, hearing aids, and dental services, all of which can quickly add up.

Don’t Forget About Long-Term Care

With seven in ten adults over the age of 65 requiring some type of long-term care services, it would be foolish not to have a plan to pay for it. The cost of long-term care can only be described as staggering and potentially devastating. According to Genworth, a leading long-term care insurance provider, the median cost (2018) for a semi-private room in a nursing home is $245 a day, or $89,270 a year.

With the average stay in a nursing home lasting two and a quarter years, there are really only two options for paying for long-term care expenses – save up another $200,000 to $400,000 in cash reserves or purchase long-term care insurance. Or you can spend down all your assets to qualify for Medicaid – not an appealing option. Depending on your situation, there may be some other options, so it would be important to include long-term care in your planning discussions with your advisor.

Don’t Set it and Forget It

One of the biggest mistakes people make in their retirement planning is to treat their future health care as just another expense. There are certainties – health care costs and utilization will increase – and there are uncertainties – your actual costs – both of which require ongoing monitoring and management to ensure your health care costs don’t eat away at your retirement lifestyle.

There are steps you can take before retirement, such as increasing contributions to your Roth IRA, 401(k) or a health savings account to build a bigger health care cushion. When you retire, make sure you fully understand your Medicare options to create the optimum coverage for your needs. After you retire, review your health care costs and insurance coverage annually. You can change your Medicare options annually to best suit your changing needs. Finally, pre- and post-retirement make it a priority to maintain your good health, which is one of the surest ways to control your health care costs. Download our free Guide to Medicare for more helpful information!