A lot goes into a well thought out retirement plan. Income streams, asset values, return expectations and expenses all play a key role in putting together a plan that works with a high probability of success.
When it comes to expenses it is important to budget for health care costs. For most retirees it is one of their three largest expenses in retirement, coming in closely behind housing and food/beverages.
Of all the expenses in retirement, it may be the one with the greatest amount of unpredictability. Not to mention, over the past forty years it has grown at a higher rate of inflation than every other major expense category.
For this blog’s purposes medical costs deal with costs associated with visits to the hospital, doctor’s office and prescription drug costs while long-term care costs pertain to receiving care to help with activities of daily living (ADLs) (e.g. dressing). This article addresses the medical costs side of the health care cost ledger, leaving the long-term care costs aside for a future topic.
Medical Costs – Medicare
For most retirees, Medicare will be their primary coverage during retirement (once they reach age 65). The major costs of Medicare are the premium and out-of-pocket costs of its various parts.
It is important to note that the higher your income the more you will have to pay for your Medicare Part B and Part D coverage. For the highest income earners (single taxpayers earning over $500,000 and married filing jointly taxpayers over $750,000) Medicare Part B can run over $500/month per person and an extra $77/month per person for Part D plansI.
Due to the coverage gaps in Medicare Part A and B (e.g., deductibles, co-pays, 20% coinsurance for Part B and no maximum out-of-pocket limit protection), it is highly recommended that retirees purchase a supplemental insurance policy (either a Medigap plan or a Medicare Advantage plan) to cover these gaps. These supplement plans can range anywhere from $0–$500/month per person in premiumsii, with the lower premium plans having more out-of-pocket costs (e.g., deductibles and co-pays) compared to the higher premium supplemental plans which usually have less out of pocket costs.
When you total the above premiums, a 65-year-old retiree may pay between $2k-to-$6k per year for their medical coverage premiums while on Medicare. However, do not forget about out-of-pocket costs. For those on Original Medicare with a Medigap plan (e.g. plan G) out-of-pocket costs should be minimal (perhaps as low as the Medicare Part B deductible – $203 in 2021). For those on Medicare Advantage they will have deductibles, co-pays and co-insurance costs based on how much they use their MA plan. Out-of-pocket costs are capped at $7,550 in 2021 for in-network care for Medicare Advantage plans. In addition to the beforementioned (for both those with Medigap plans and Medicare Advantage plans), is costs for Part D coverage (such as deductibles and copays) and any potential income related premium surcharges for Part B and Part D coverage. For those with high plan usage and high prescription drug use, out-of-pocket costs can get expensive and should be accounted for when planning your annual expenses.
Medical Costs – Pre-65
For those who retire before Medicare age, health insurance coverage options are limited and are usually more expensive compared to employer-provided coverage and Medicare. One of the primary options for health insurance coverage before age 65 are individual policies offered on the health insurance marketplace (categorized as bronze, silver, gold, and platinum plans). An average premium for an individual silver plan (for the silver plan – insurance company pays 70% of medical costs and insured covers 30%) is $452/monthiii. More comprehensive plans charge higher premiums but cover a higher percentage of medical costs. There are premium subsidies available for these plans based on household income. Under the American Care Act those with income 400% of the federal poverty level (2021 -$51,520 for a single individual and $106,000 for a family of four) (source: U.S. Department of Health and Human Services) and below were eligible for varying levels of subsidies in the form of a tax creditiv. With the passage of the America Rescue Plan, the subsidies are expanded for those with income under 400% of the federal poverty level and made available for those with income over 400% of the federal poverty levelv. How much each person (or family) can receive in subsidies is a product of their household income and health plan selection.
Out-of-pocket costs for the marketplace plans are capped in 2021 at $8,550/individual and $17,100/family. The out-of-pocket limit does not include monthly premiums, anything you spend for services not covered by your plan and out-of-network care and services.
Besides a plan on the health insurance marketplace, other options for coverage include COBRA and former employer retiree coverage. COBRA allows a person to stay on their employer sponsored health insurance plan for up to 18 months after they retire. The cost of the coverage increases to 102% of the full costs of the plan premium but allows for continuation of current coverage. For others, their previous employer may offer retiree health insurance coverage. Most of these plans still require a premium to be paid by the former employee but are usually a less expensive option compared to the others described above.
Dental and Vision Coverage
Another item worth mentioning when it comes to medical costs in retirement is dental and vision coverage. While there are separate insurance plans that retirees can purchase to cover both, the coverage tends to be limited (usually a cap of $1,000 for dental plans and either a benefit cap or predetermined discount rate for vision plans) and tend to be more focused on preventative care. Generally, any major dental work or elective eye surgeries will have to be covered out-of-pocket.
When it comes to future health care costs as with all other retirement planning items, it is important to plan. While it is impossible to know all future health care costs, you can carefully plan your expected costs for care and build into your plan the needed flexibility to cover those unexpected costs.
iiiKaiser Family Foundation website
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