Health Care Costs in Retirement: What You Need to Know

By Stephen Petrillo, CFP®, Financial Planner, First Republic Investment Management
June 2, 2018

Determining how much money you will need in retirement for medical expenses and long-term care is challenging, as you can’t know exactly what your future health care needs will be. However, understanding the various types of health care costs and the potential strategies for minimizing those costs can help you prepare more effectively and reduce your long-term financial risks.

Here’s a look at four health care costs to be prepared for:

1. Medicare

Medicare, the federal health insurance program that most Americans are eligible for starting at age 65, currently consists of four parts: Part A (hospital insurance), Part B (medical insurance), Part C (private health insurance plans, known as Medicare Advantage) and Part D (prescription drugs). Medicare does not cover hearing care, vision care or costs associated with long-term care, though you can buy additional insurance coverage that does. (See sections below.)  

There is no premium cost for Part A, while Part B’s premium varies depending on the covered person’s income. Both Part A and Part B (often referred to as “Traditional Medicare”) have co-payments and annual deductibles, but no annual out-of-pocket limit on how much the covered person pays toward their medical costs. That’s why, in order to cover the often-high out-of-pocket costs of traditional Medicare, some seniors elect to get retiree insurance from a previous employer. An additional option is to purchase Medigap – or “supplemental” – insurance coverage or Medicare Advantage.

2. Medigap

Medigap policies are designed to help cover some or most of traditional Medicare’s out-of-pocket costs, including co-payments, co-insurance and deductibles. Policies are sold by private insurers and feature 10 different Medigap plan options. Seniors who don’t purchase Medigap coverage when they first join Medicare risk facing much higher premiums later on or being denied Medigap coverage altogether. Medicare requires that during certain periods, its participants have the right to a guaranteed Medigap policy. This means that a Medigap policy must be issued regardless of the applicant’s health condition. Outside of designated periods, insurance companies can use medical underwriting. If the applicant has health issues, a Medigap policy may be denied. By carefully planning – and comparison shopping – for Medigap policies, individuals may save hundreds of dollars a year.

Keep in mind that Medigap policies do not cover prescription drugs, so a stand-alone Medicare Part D plan may be purchased. In general, seniors will not need (and cannot purchase) a Medigap policy if they get Medicare Advantage.

3. Medicare Advantage

Seniors on traditional Medicare can opt to receive their Part A and Part B benefits by getting a comprehensive health plan, known as Part C, or Medicare Advantage, through a private insurer. These plans generally include prescription drug coverage. Seniors with a Medicare Advantage plan continue to pay their Part B premium while also generally paying an extra premium for the additional coverage they receive through the private insurance. Medicare Advantage plans usually have deductibles and co-pays, but unlike original Medicare, they limit out-of-pocket costs. That means that when the insured person reaches the annual out-of-pocket limit, the plan pays 100 percent of his or her medical bills for the rest of the year. 

4. Long-term care insurance

At some point, many Americans need temporary or ongoing care to help them with daily self-care activities, either in their home or in a professional care facility. According to the U.S. Department of Health and Human Services, 70 percent of Americans over the age of 65 will need some form of long-term care services. A 2017 survey by Genworth Financial estimates that the median rate for a private room in a nursing home is $8,121 per month, while assisted-living centers charge an estimated median rate of $3,750 per month, and an in-home health aide costs $4,099 per month.

Traditional Medicare, Medigap and Medicare Advantage plans do not cover such in-home or facility care, so it’s crucial to plan separately for these potentially very significant costs.

People with very limited income and financial resources may qualify for government-paid Medicaid coverage to help pay for care either in their home or in an assisted-living center or nursing home. Those who do not qualify for Medicaid assistance, however, must either cover these costs using their own assets or through long-term care insurance. Since the cost of long-term care can deplete someone’s life savings, people with significant discretionary income who are looking to leave assets to their loved ones should consider purchasing long-term care insurance. It makes sense to evaluate long-term care coverage options sooner than later, as premiums tend to rise with age and some people may be denied coverage altogether if they wait too long.

Thinking realistically

Many people don’t like thinking about their future health and long-term care needs, much less planning for them. And, while understandable, even if you’ve lived a very healthy life so far, there’s certainly no guarantee you won’t incur significant health care costs later in life. For these reasons, it’s important to think realistically about the future, take steps now to protect your assets, and plan for these vital — and potentially very high — costs.

This article was originally published Feb. 17, 2017 and has been updated as of June 1, 2018.

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