It’s not surprising that a survey last year by T. Rowe Price found that health care costs are the biggest financial worry among retirees.
On the surface, the numbers are unsettling. According to a 2022 analysis by the Employee Benefit Research Institute, a couple with average Medicare premiums and out-of-pocket expenses could find that they need $212,000 to $318,000 in savings to cover their health expenses throughout retirement.
Fidelity confirmed the findings by the Employee Benefit Research Institute.
On average, according to the 2024 Fidelity Retiree Health Care Cost Estimate, a 65-year-old individual may need $165,000 in after-tax savings to cover health care expenses.
While such numbers sound daunting, it’s not as simple as the headline suggests.
Let’s dig a little deeper.
According to Fidelity, Medicare Part B (doctors) and Part D (prescription) premiums will account for about 43% of the dollars you spend on health care in retirement.
In other words, almost half of your annual health care expenses are planned expenses. They are budgeted and paid from monthly income.
When we share this with clients, we find that it eases some of their financial trepidations.
Of the remaining 57%, 47% will flow into co-payments, co-insurance, and other deductibles used to pay your doctor and for hospital visits. The remaining 10% will be spent on prescription drugs.
Be that as it may, we want to stress that health care costs tend to rise in retirement. As we get older, our use of health care typically rises.
Medicare primer
If you are approaching retirement, here are the basics.
Did you know that there is a penalty if you miss Medicare’s initial enrollment period (IEP)? And it’s not just a one-time penalty. It’s permanent, and it’s tacked on to your monthly premium.
Let’s explain.
Your IEP is a seven-month window—three months prior and three months after your 65th birthday. Miss the window for Medicare Part B, and your monthly Part B premiums could go up 10% for every 12-month period you go without coverage.
There’s also a 1% penalty per month for each month you delay enrolling in Part D prescription drug coverage.
Now that we’ve explained the penalty, what is Medicare Part B?
Part B helps cover:
- Services from doctors and other healthcare providers
- Outpatient care
- Home health care
- Durable medical equipment
- Many preventive services
But what if you are 65 and insured by your employer?
That’s great! You’ll have the opportunity to enroll in Medicare penalty-free when you leave your employer through a Special Enrollment Period.
Starting this year, your chance to join lasts for two months after the month your coverage ends.
We’ve touched on Part B, so let’s review Part A. Part A helps cover inpatient care in hospitals, skilled nursing facility care (SNF), hospice care, and home health care.
It’s free for most folks as you or a spouse paid Medicare taxes long enough while working—generally at least 10 years.
Medicare doesn’t generally cover long-term care in a nursing home.
Your liability:
- Days 1-20: $0.
- Days 21-100: $204 each day.
- Days 101 and beyond: You pay all costs.
Medicare Part A may provide coverage for SNF care that’s medically necessary.
Medicare Part C, or Medicare Advantage, provides for Part A, Part B, and most include Part D. Medicare Advantage Plans may offer extra coverage, such as vision, hearing, dental, and/or health and wellness programs.
It is like a PPO or HMO, so check that your doctors are a part of your network before you purchase a Part C plan. If you use in-network facilities, you will have a maximum out-of-pocket of $8,850 for approved in-network services this year.
Traditional Medicare does not have an out-of-pocket limit for covered services, and a Medigap policy is needed to limit your out-of-pocket liability.
Paying for health care—be proactive
- Consider various retirement accounts, such as IRAs and Roth IRAs. The IRA catch-up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 to include an annual cost-of-living adjustment. It remains $1,000 for 2024, according to the IRS.
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans is $7,500 for 2024. Therefore, participants in 401(k), 403(b), and most 457 plans who are 50 and older can contribute up to $30,500 starting in 2024.
Take advantage of these catch-up provisions.
- If you are enrolled in a high-deductible health plan and it offers a health savings account (HSA), you have an excellent vehicle to accumulate and save for eligible health-related expenses. These accounts are not subject to income tax, and you may use them for eligible health-related expenses. Funds roll over year after year.
- Should I buy long-term care insurance? Medicare Part A (Hospital Insurance) may cover care in a certified SNF. But it must be medically necessary for you to have skilled care. Medicare doesn’t cover custodial care (such as nursing homes) if that’s the only care you need.
Medicare.gov defines custodial care as activities of daily living (like bathing, dressing, using the bathroom, and eating) or personal needs that could be done safely and reasonably without professional skills or training.
One option that may help absorb long-term care costs, such as assisted living or a nursing home, is a long-term care policy. But it won’t come cheap.
Long-term care insurance policies reimburse policyholders a daily amount (up to a pre-selected limit) for services to assist them with activities of daily living. You can select a range of care options.
According to LongTermCare.gov, the cost of a policy is based on:
- How old you are when you buy the policy
- The maximum amount that a policy will pay per day, and
- The maximum number of days a policy will pay.
The maximum amount per day times the number of days determines the lifetime maximum you will receive.
You may not qualify for long-term care insurance if you are in poor health.
Before you purchase a policy, please be aware that the insurance company may raise the premium on your policy. Therefore, we encourage you to contact your insurance professional for additional information and request data on the company’s premium rate history.
We know that options may feel overwhelming. Please let us know if you have any questions, and we’d be happy to assist in any way we can.
