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Are You Prepared for Health Care Costs During Retirement?

Published October 27, 2017 by Brady Cobin Law Group, PLLC

People think that Medicare covers all of their health care after they retire. However, there are many gaps and you’ll need to get the timing right on what insurance products to buy and when to buy them.

Medicare does not cover 100% of health costs. As a result, many seniors get an unpleasant surprise when they learn just how many out-of-pocket expenses they will have. That’s why it’s important to have a clear understanding of what kind of health insurance you’ll need to buy to cover the gaps. Timing is important too: if you make the wrong decisions, certain costs will be permanently higher.

Kiplinger’s recent article asks, “How Much Will You Spend on Health Care in Retirement?” A new study by Fidelity Investments found that the average 65-year-old couple retiring this year, will need $275,000 to pay for medical expenses during retirement. This includes Medicare premiums, co-payments, and deductibles (or a policy to fill coverage gaps). They will also need Medicare Part D prescription-drug coverage, plus out-of-pocket drug costs over the next 20 years for the man and 22 years for the woman. That number doesn’t include the potential costs of long-term care.

Medicare premiums can be as much as several thousand dollars a year. Medicare Part A, which covers hospitalization, is free for most people. However, you’ll pay a monthly premium for Part B (doctor visits and outpatient care). Those who sign up for Medicare in 2017 will pay about $134 per month for Part B, while individuals who have had Medicare premiums deducted from their Social Security benefits in previous years pay less.

If your adjusted gross income plus tax-exempt interest income is more than $85,000 for singles or $170,000 for married people filing jointly, you’ll have to pay even more. The monthly premiums can range from $187.50 to $428.60 per person per month in 2017.

Remember that, along with these numbers, Medicare will leave gaps. You will need to pay deductibles and co-payments for hospitalization, doctors’ visits, procedures and other medical care. Medicare also doesn’t cover prescription drugs. Some fill in these gaps with retiree health care coverage from a former employer. However, that’s not that common today. Instead, you’ll need to buy a Medigap policy to cover these out-of-pocket expenses, as well as a Part D prescription drug policy to cover drugs, or purchase a Medicare Advantage plan to pay both medical and drug expenses.

You can reduce these extra costs by implementing these strategies:

  • Shop for a Medigap policy when you’re first eligible. You have six months after signing up for Medicare Part B to choose any Medigap plan. Insurers can charge more or deny coverage because of preexisting conditions. Plans with the same letter provide the same coverage, but the price can vary significantly by insurer.
  • Select the best Part D policy. This can vary every year, because your prescriptions change, and insurers revise their coverage. You can change Part D prescription drug policies every year during open enrollment from October 15th to December 7th for coverage starting on January 1st.

Look at your Medicare Advantage plans every year. If you choose a Medicare Advantage plan, you can also shop for a policy every year during open enrollment. Use the Medicare Plan Finder to compare the cost for drugs and health care for plans in your area.

  • Medicare surcharges. Your Part B and Part D premiums will be higher if your income is higher (more than $85,000 if single or $170,000 if married filing jointly). The Social Security Administration uses your most recent tax return to figure the premium. However, if your income has dropped since that time because of certain life-changing situations, like divorce, death of a spouse, or retirement, then you can substitute your more recent income.
  • Use generics or cheaper treatments. With Part D prescription-drug coverage, you will still have some out-of-pocket costs for your medications. You could also pay thousands of dollars for your share of the cost of expensive specialty drugs. Ask your doctor if there are cheaper generic drugs, or if there are therapeutic alternatives to treat the same condition for less. You should also check if you can save money by using a preferred pharmacy or a mail-order pharmacy.
  • Remember to make the most of your tax-free health savings account. This can be a big help during retirement. While you cannot add any new money to an HSA once you’ve signed up for Medicare, the money in the account can be withdrawn—tax-free—for medical costs. Funds in the HSA can be used to pay premiums for Medicare Part B, Part D, and Medicare Advantage plans. Note that you cannot use HSA funds to pay for Medigap plans.

Reference: Kiplinger (September 20, 2017) “How Much Will You Spend on Health Care in Retirement?

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