Jun 3, 2024
Health care is often one of the biggest expenses Americans face in retirement. It's a sad reality that health tends to decline with age, and unfortunately Medicare doesn't fully cover all care costs.
For those hoping this government-run program would foot the bill, it may come as a surprise just how far short it falls. With prescription drug limitations, co-insurance costs, coverage gaps and high premiums for supplemental policies, the amount of money you end up having to spend can be eye-popping.
Advertisement
A report from the Employee Benefit Research Institute (EBRI) revealed that a couple, both aged 65-plus, enrolled in a Medigap plan with average premiums in 2023 would need an estimated $351,000 saved for health care to have a 90% chance of affording medical expenditures in retirement. Couples with higher-than-average prescription drug expenses fare even worse, with EBRI estimating they'd need $413,000 to have a 90% chance of being able to pay their care costs. These savings targets cover premiums, deductibles and prescription drugs.
A Medigap plan is a private insurance policy designed to fill the gaps in Medicare coverage.
Affording these medical expenses can be a major challenge, so it's important to plan carefully to ensure your health needs don't lead to financial disaster in retirement.
Why is health care so expensive as a retiree?
While medical care comes at a hefty price, many seniors may misunderstand what their responsibilities will be because the health-care system can be so confusing.
Medicare is the primary source of coverage for Americans aged 65 and up, and it's provided through the government. But traditional Medicare consists of different parts, including:
Part A: Covers inpatient hospital care, hospice care and skilled nursing care or home health care in limited circumstances. Most people pay no premiums for part A, and there's a $1,632 deductible per inpatient hospital benefit period. You also become responsible for covering some hospital or nursing care costs after a certain number of days in a facility.
Part B: Covers outpatient care. You'll pay premiums, which are $174.70 per month for most retirees in 2024 (more for high earners). You're also responsible for 20% co-insurance costs for most medical services and there's a $240 annual deductible.
Part D: Covers prescription drugs. You have a choice of Part D plans, and premiums and co-insurance costs can vary.
Advertisement
You also have the option to sign up for Medicare Part C, or a Medicare Advantage plan, which is a private health insurance plan that replaces Medicare (Parts A and B, sometimes D) and can include additional benefits, such as vision and dental care. The EBRI report indicates those enrolled in Medicare Advantage plans generally have a lower savings target, but these plans often have limitations. There are a variety Medicare Advantage plans available, and costs vary widely.
Alternatively, you can choose a Medigap plan, which is a supplement to traditional Medicare that is sold by private insurers to those already with Medicare Parts A and B. Medigap plans typically help pay for co-insurance costs and some things Parts A and B normally don't cover.
No matter which of these options you choose, though, there are costs involved .
Must Read
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and the simple steps to fix it ASAP
- Robert Kiyosaki begs investors not to miss this ‘explosion’ — says this 1 asset will surge 400% in a year
- Vanguard reveals what could be coming for U.S. stocks, and it’s raising alarm bells for retirees. Here’s why and how to protect yourself
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
Making a plan to afford health care
There's no cheap or easy way to get health care as a retiree, so your best option is to prepare for it.
If you're eligible for a health savings account (HSA), contribute as much as you can. You get tax breaks for money you earmark for out-of-pocket medical costs in this account. You can contribute with pre-tax funds, invest without paying taxes on gains and make tax-free withdrawals when you use the money to pay for health-related expenses.
It's also important to remember there's a dedicated enrollment period for Medicare, starting three months before you turn 65 and ending three months afterward. If you delay signing up for Medicare coverage, you may be subject to a lifetime penalty on your monthly payments.
You'll want to make sure you save diligently for health care — and all your other retirement costs — during your working life so you have the money you need for your golden years by the time your career is over.
You May Also Like
- Turning 50 with $0 saved for retirement? Most people don’t realize they’re actually just entering their prime earning decade. Here are 6 ways to catch up fast
- This 20-year-old lotto winner refused $1M in cash and chose $1,000/week for life. Now she’s getting slammed for it. Which option would you pick?
- Warren Buffett used these 8 repeatable money rules to turn $9,800 into a $150B fortune. Start using them today to get rich (and stay rich)
- Here are 5 easy ways to own multiple properties like Bezos and Beyoncé. You can start with $10 (and no, you don’t have to manage a single thing)
Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
