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Healthcare in retirement can be expensive.
A new study examines how much money a 65-year-old — who is of Medicare eligibility age — would have had to set aside to have a 50%, 75%, or 90% chance of covering their healthcare costs over the course of their expiration Retirement. The research shows that the amount depends, at least in part, on a person’s Medicare coverage decisions and can reach hundreds of thousands of dollars.
“Healthcare is likely to be a big expense for you in retirement,” said Paul Fronstin, director of health benefits research at the Employee Benefit Research Institute and co-author of the study.
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“You don’t want to be shocked when you retire and find out this or realize that Medicare doesn’t cover everything,” Fronstin said.
The study assumes that money invested by age 65 is invested, and even if you make withdrawals to cover healthcare costs, the account is earning 7.32% annually in interest and investment returns. In other words, you could end up spending far more than the amounts in the study.
Here are the two common coverage scenarios that were analyzed.
1. Basic Medicare plus Medigap and Part D
The first scenario involves combining basic Medicare — Part A (hospital insurance) and Part B (outpatient care) — with a standalone Part D plan (prescription drug insurance) and a policy called a Medigap, both of which are offered by private insurance companies .
Medigap covers some or most co-payments—ie, deductibles, co-payments, or coinsurance—that come with basic Medicare. Plans are standardized across most states—they are simply labeled A, B, C, D, F, G, K, L, M, and N, and each lettered plan differs in what is covered. The standardization means that benefits are generally the same regardless of where you live or which insurance carrier offers them, e.g. B. Plan G or Plan N.
While Medigap coverage means fewer out-of-pocket expenses — and therefore might be a more predictable budget item — premiums can be expensive, depending on where you live and the specifics of the policy. And over time, those monthly payments add up.
Here’s what the study shows: A 65-year-old man enrolled in a Medigap Plan G with average monthly premiums — $204 is used for the calculation — would need to have $96,000 in savings to get a 50 percent benefit Chance of having enough money to cover premiums and average prescription drug expenses, according to the analysis.
A woman of the same age and with the same coverage options would need $116,000 for the same 50 percent chance of having enough money. (The higher amount is because women generally live longer than men.)
For a 75% chance, the same man and woman would need to have saved $137,000 and $159,000, respectively. And at 90% probability, those amounts would be $166,000 and $197,000.
As an extreme case, a couple with heavy prescription drug spending would need to have $383,000 in savings to have a 90 percent chance of having enough to cover their healthcare costs.
2. Benefit Plan Coverage
The second coverage scenario analyzed in the study involves a Medicare Advantage plan, which includes Parts A and B, and typically Part D, plus extras like dental care and vision. Of Medicare’s 64.5 million beneficiaries, 29.1 million are enrolled in Advantage plans, and that number is expected to continue to grow.
While many Advantage plans do not have a premium, they do have their own deductibles, co-payments or coinsurance, and maximum deductibles that vary from plan to plan. In addition, Part D coverage of each plan may vary in terms of premiums, deductibles and co-payments, and the prescription drugs covered. (This is the same case as the standalone Part D plans.)
Although there are large differences between individuals in terms of frequency of use of health services and their overall health, participants in Advantage Plans generally require lower savings goals, the study shows.
With Advantage plans, your main service spend is made while driving, unlike Medigap where you pay higher premiums for less backend cost sharing.
Danielle Roberts
Co-founder of Boomer Benefits
A 65-year-old man with average health care expenses would need to set aside $56,000 to have a 50 percent chance of meeting his health care needs, and a woman in this situation would need $67,000, according to the study. For a 75 percent chance, the man would have to set aside $79,000 and the woman $92,000. And for a 90% chance, those respective amounts are $96,000 and $113,000.
“With Advantage plans, your primary expense will be for services while you’re driving, unlike with Medigap, where you pay higher premiums for less backend cost sharing,” said Danielle Roberts, co-founder of insurance company Boomer Benefits and author of 10 Costly Medicare Benefits Mistakes you can’t afford.”
Here’s another big difference between the two scenarios: Advantage plans often require you to use their network of providers — doctors, hospitals, pharmacies, and the like — and that’s not the case if you only have basic Medicare with or without Medigap.
Regardless, it’s important to consider your own health needs before assuming an Advantage plan would be less expensive, Roberts said.
“Sometimes people opt for a low-premium Medicare Advantage plan, only to find that they’re shelling out hundreds of dollars each year on their Part B medications [those administered in a doctor’s office] or long-life medical devices,” Roberts said. “In that case, Medigap may actually be more cost-effective.”
However, she said it’s also important to remember that Medigap premiums generally increase annually.
“If paying your premium at age 65 is too stressful for you, you may not be able to keep up with the premiums over the years as they increase,” Roberts said. “It’s one of the reasons so many people are switching to Medicare Advantage plans.”
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