It's an issue that’s easier to worry about than to solve. Most people in the pre-retirement years (76% of those aged 55-64) have a high level of concern about health care costs, according to a Merrill Lynch survey. Yet when it comes to making a concrete plan for the retirement years, many forget to budget for healthcare costs. You may thinking about how much “take home pay” from pensions and investments you need to cover living expenses, but forget you will now be responsible for health insurance premiums plus a host of costs that employer health plans may cover but Medicare does not.
Unfortunately, healthcare may well cost you more in retirement than it did in your working years. AARP has a retirement planning calculator that can provide an overall estimate of your healthcare costs. It found, for example, that a nonsmoking normal weight Florida couple, both 65, who expect to live until 90 will spend a total of $404,450 on healthcare for the rest of their lives. Of this, Medicare will cover a bit more than half, or $244,363, leaving an estimated shortfall of $160,087 to be paid out-of-pocket. If the couple acquires some diseases along the way -- say breast cancer and dementia for her, and prostate and coronary artery disease for him -- total health care costs rise to $915,931. Medicare would cover two-thirds, or $627,976, leaving a shortfall of $287,955.
Before you make yourself sick over this, there are a number of options that can help you manage costs over the decades of your retirement. Choosing a flexible, staged approach and making smart decisions for each phase of your life, can help you tame the waters and stay confident, even when Presidential election rhetoric makes it feel like Social Security and healthcare insurance for younger retirees and even Medicare itself are in serious peril.
Early retirement options. If you retire before you reach Medicare-eligibility age of 65, you’re in a better position these days than you would have been before the passage of the Affordable Care Act, or Obamacare. If you buy insurance at healthcare.gov you will not be charged more for having a preexisting medical condition, and can easily compare plans on the basis of premiums and out-of-pocket costs. Each plan lists the maximum out-of-pocket expense you may be liable for each year. And if your income is below certain levels, you may be eligible for tax credits to help you pay the premiums. (Early retirees may also want to read How to Choose A Healthcare Plan. Also, see Planning For Health Costs in Retirement.)
Medicare is not free. Retired or not, you should register for Medicare in the months before you turn 65. There is no premium for Part A, which covers hospital care, with a $1,260 deductible for each benefit period. But there is a $104.90 a month premium for Part B, which covers doctors. You may not need to pay for Part B if you still have employer health insurance. But once you are off the plan you do have to pay for it, and the monthly premium may be higher if your income is over $85,000 a year. This premium is deducted from your social security check, and for this reason some may not realize they’re paying it. Medicare Part B also has $147 a year deductible and typically pays 80% of the Medicare-approved amount for most doctor services.
Don’t forget drug insurance. Medicare Part D, or drug insurance, is a separate policy, with premiums that can, on your request, be deducted from your social security check. Premiums vary, depending on the drugs covered, co-pays and deductibles. You can compare policies at Medicare.gov. Even people who do not currently take any prescription drugs should buy at least a basic drug insurance policy, since if you need it later you will have penalties applied to your premium for all uncovered years.
Choosing supplemental insurance. Many retirees purchase a gap or supplemental health insurance policy to cover the out-of-pocket costs that Medicare doesn’t. It's important to remember these plans pay only for expenses that Medicare covers – and thus will not pay for those dental X-rays or treatments not approved by Medicare. The benefits of supplemental plans, labeled by letters, are standardized but the monthly premium rates can vary by insurer. Combining traditional Medicare with a gap insurance policy may be a good approach if you live in more than one locale, since you can get medical care anywhere in the U.S. When you first enroll in Medicare, companies must sell you a supplemental policy even if you have serious medical conditions. Later on in most states they have the option to charge you a premium price or reject you in some situations.
Or, a Medicare Advantage plan. Medicare Advantage plans, which are HMOs or PPOs, are another way to make sure you have more complete health insurance. The plans pay all or most of Part A and B out-of-pocket costs as long as you use in-network physicians and facilities. These plans may include drug coverage and some extra benefits such as free gym membership in the Silver Sneakers program. You still have to pay your Part B premium to Medicare, and the plan itself may have a premium.
Routine dental care, eye exams and glasses, and hearing aids are not covered by Medicare. The costs of in-home nursing care or custodial care in a nursing home are also not covered. Most medical expenses occur toward the end of life, so earmarking more assets for your later years makes sense.
As you watch how expenses shake out during retirement, you can reconsider your choices. You can change or enter a Medicare Advantage plan each year during Open Enrollment (October 15 through December 7 2015, for coverage that starts on January 1, 2016). So it's worth giving some thought about how your situation may have changed. Do you still live in more than one locale and do a lot of traveling? If not, a Medicare Advantage plan may now be a better choice. Have you or your spouse contracted a serious disease that you feel needs treatment by the very best of the best in the country? If so, it might be time to switch from an HMO to regular Medicare if you can get a supplemental policy or pay for the gaps out of your own funds.
Part D drug policies should also get a new look each year. If you’re on a new medication, make sure that your plan covers it. If you’re finding drug co-pays too high, you may do better with a slightly more expensive premium and more generous coverage.
And while considering how you might pay for nursing home care might seem a little premature at 65, in later years it can become a pressing issue. Options include long term care insurance and alternatives.
The healthcare landscape is confusing and subject to change, and the savings levels recommended by experts can seem totally overwhelming. Choose the best health insurance options for you at the present time, and stay alert to making changes in the future if financial or health factors change. And keep in mind that you can also save money by being realistic about what doctors can actually do for you, and what you should be doing for yourself. An ounce of prevention is worth a pound of co-pays.