When figuring your retirement plan and how much money beyond your Social Security benefits you’ll need to cover expenses, don’t forget to make a realistic estimate of health care costs.
According to Fidelity Investments, a 65-year-old couple retiring this year will need an average of $275,000 (today’s dollars) to cover medical costs throughout retirement. To HealthView Services (HVS), the comparable couple will need $404,253 for these health costs in today’s dollars. (Both estimates exclude the cost of long-term care.)
HVS’ cost estimates include retirees’ premiums for Medicare (except for Medicare part A), supplemental and dental insurance, and outlays for all other out-of-pocket health care expenses.
And if those figures don’t floor you, consider: By HVS’ forecast, for the foreseeable future, retirees’ health care costs should jump an average 5.47% annually. That means health care during retirement for a 65-year-old couple retiring this year will end up costing $607,662.
The effects of inflation and longevity — the longer people live, the more medical costs they incur, especially toward the end of life — will be two factors behind steepening health care costs for retirees. To illustrate some inflation components, according to HVS, from 2018 to 2025, yearly inflation will average 3.5% for Medicare Part B insurance premiums, 3.8% for supplemental insurance, and fully 8% during that period for Medicare Part D premiums.
How Medicare Works
Medicare Part A provides premium-free hospitalization insurance. Medicare Part B covers some 80% of doctors’ visits, lab work, durable medical equipment and the like, and includes a premium, which is deducted from people’s Social Security benefits. If they wish, Medicare recipients also can buy supplemental insurance to cover what Medicare Part B doesn’t, and can chose to enroll in a Medicare Part D drug program. Or seniors can purchase an all-in-one Medicare Advantage plan from an insurance company approved by Medicare.
Clearly, for many people, footing large health care bills will be daunting. As one indication, according to the Secure Retirement Institute, only 54% of baby boomers have any retirement savings. But with some savvy moves, people can help mitigate the cost onslaught.
Steps To Take Now
Among the steps experts suggest people take during or before retirement:
Boost income and assets through such means as working more years or working part-time, downsizing a home or obtaining a reverse mortgage.
Shop around for health plans. To limit out-of-pocket health costs, make sure the insurance plans you choose cover the services, doctors and products you need. Just choosing plans with the lowest premiums may not be smart, especially if you need multiple services and pricey medicines. For help shopping for coverage, check the Medicare Plan Finder section at www.medicare.gov.
Consider using a Medicare Advantage plan. To Elliot Omanson, of Sage Financial in Shawnee, Kansas, “Getting an Advantage plan is one of the best things you can do to hold down medical costs.” Advantage plans include Medicare Parts A and B and typically cover such additional costs as vision, hearing, dental and drugs. Among their financial draws, plans’ monthly premium may be as low as $0, although you still pay your Medicare Part B premium, and there’s a yearly cap of $6,700 on what you pay out-of-pocket for services covered under Medicare Parts A and B.
Keep healthy. Eat right, exercise, maintain your proper weight, and take needed medications as prescribed. Doing so can pay off handsomely. “For instance, if you have high blood pressure and you follow the protocol for taking medications, and limit your weight and salt intake, you will live longer and save an average of $7,000 a year in health care costs over your lifetime,” says Ron Mastrogiovanni, CEO of HealthView Services.
Save as much money as possible, and as early as possible. Popular tools include 401(k) plans and IRAs. Moreover, for those with a high-deductible health insurance plan, using a health savings account (HSA) gives you a triple tax-advantaged way to save for medical costs. Bob Kaiser, senior vice president and head of sales for health benefit solutions at Bank of America Merrill Lynch, spells out HSAs’ tax attractions: Contributions are tax-deductible, or if made through a payroll deduction, reduce your taxable income by the amount contributed; account earnings are tax-free; and withdrawals made for qualified medical costs aren’t taxed. However, experts note that once you enroll in Medicare, you can’t contribute to an HSA.
A retirement savings strategy suggested by Adam Stavisky, senior vice president at Fidelity Benefits Consulting: “As a general rule of thumb, if an employer offers a matching contribution to your 401(k) plan, invest up to the level of that match. Then, if you have a high-deductible health insurance plan, and more ability to save, you can put additional money into a health savings account. If more money is available, go back to your 401(k) account and contribute up to the allowable limit for that tax year.”
This story originally appeared on Investor’s Business Daily.
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