- \ Gerard Gruber
- May 11, 2021
Becoming eligible for Medicare when you turn 65 is a significant financial milestone. No more paying huge health insurance premiums, and most of your health care costs are covered. The operative word...
Becoming eligible for Medicare when you turn 65 is a significant financial milestone. No more paying huge health insurance premiums, and most of your health care costs are covered. The operative word in the last sentence is “most.” While Medicare is a great program, there are some significant gaps in the coverage that can blindside retirees who haven’t planned for health care costs in retirement.
Health Care Costs in Retirement are High, and They’re Going Higher
When all costs are considered, including Medicare premiums, deductibles, copayments, and uncovered costs, the average 65-year-old couple will pay an average of $295,000 out-of-pocket in health care costs over their lifetime. That can be a significant portion of the retirement income pie. The average annual healthcare costs for people who reach 65 are $11,300 per year.
Historically, medical costs across the board have increased faster than inflation due to rising demand. However, due to the massive influx of people becoming Medicare-eligible, the demand for services is at its highest, putting even more upward pressure on medical costs. What started out as an average $11,300 per year average cost can increase substantially over 20 years. However, with some proper planning, most people can prepare for rising health care costs in retirement.
What’s Not Covered by Medicare?
Medicare Part A and Part B also referred to as Original Medicare, will cover a significant portion of your medical expenses once you turn age 65. Part A is your hospital coverage, helping to pay for inpatient hospital stays, surgery, hospice care, and skilled nursing facility stays. Part B is your medical insurance, helping to cover the costs of doctor’s visits, outpatient services, some preventative services, and some medical equipment and supplies. Part A is free, while Part B costs $148.50 per month. The Part B premium can increase for higher earners.
Here are some common medical expenses not covered by Medicare:
Copayments and deductibles. For Parts A and B, you are responsible for copayments and deductibles. The deductible for Part A is $1,484 in 2021. For Part B, it’s $203. As far as copayments, you generally are responsible for 20 percent of the cost of doctor services, outpatient costs, and medical equipment.
Prescription drugs. Original Medicare doesn’t cover the cost of outpatient prescription drugs. However, you can buy a separate Part D specifically to cover the expenses. The average Part D premium in 2021 is $33.
Dental care, vision care, or hearing aids. Medicare doesn’t cover dental or vision care. Nor does it cover hearing aids. You can purchase coverage separately or add it through a supplemental Medicare plan (discussed below).
Long-term care. For many retirees, their most significant expense is the cost of long-term care. While Medicare does cover some skilled nursing services, it does not cover custodial care. Coverage for custodial care can be purchased separately with a long-term care policy. Or you can check to see if your life insurance policy offers living benefits.
Covering the Gaps in Medicare Coverage
One way to manage your out-of-pocket health care expenses is by purchasing a Medigap policy. With a Medigap policy, you have little or no out-of-pocket costs. When you are billed for medical services, Medicare covers what it can then passes the bill on to Medigap to pay the rest. Average Medigap premiums range from about $150 to $270 per month, depending on your age and health history. Some people may not qualify for coverage. Medigap doesn’t cover dental, vision, or hearing aids, and you will still need Part D to cover your prescription costs.
Alternatively, you can shop the private insurance market for a Medicare Advantage plan. Medicare Advantage plans are similar to Medigap plans, except they do include Part D coverage. Also, Medicare Advantage plans only provide coverage for in-network services. Though you are responsible for a deductible and some copays, there is an annual cap on out-of-pocket costs. Some Medicare Advantage plans offer dental, vision, and hearing aid coverage. Premiums range from $0 to more than $100 per month, depending on the plan. All enrollees pay the same premium regardless of age or health.
Build Up Tax-Free Savings to Cover Gaps
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. Both plans allow for tax-free withdrawals, which is important because they won’t be included in your Social Security tax calculation or count towards your Medicare Part B premium calculation.
The ideal tax-free account to save for health care costs is a Health Savings Account (HSA). With an HSA, your contributions are pre-tax, your account earnings are tax-free, and your withdrawals are tax-free if used to pay for medical costs. You need to pair an HSA with a high-deductible insurance plan, and you can’t participate in another health insurance plan.
If that’s not an option for you, you could start contributing to a Roth IRA. Your contributions are after-tax, but your earnings and withdrawals are tax-free.
Stay Healthy
One of the surest ways to control your health care costs is by maintaining your health. Your lifestyle choices and habits have a bigger impact on your health as you age. Eating right, exercising, staying socially active, and regular preventative care can help to keep your health care costs in check.
If you are unsure how to work healthcare related expenses into your retirement plan, the financial professionals at Harbor West can help you assess your current and projected financial need and make an informed decision. Contact us today to schedule a complimentary discovery call with one of our trusted advisors.