It's no secret that Americans are living longer, thanks to advances in science and medical care. Longer life means more years of needing affordable health care.
Today's workers need to plan ahead to be able to afford the costs of health care during retirement. How much money each person will need depends on many factors.
Factors to consider include:
- Your health status
- Whether you're managing a certain condition
- Availability of subsidized retiree benefits
- Whether you plan to work part time to maintain health care benefits
- What types of health plans are available in your area
You may need help from a financial planner to develop a strategy to save for your care during retirement. Let's look at some of the basic things you need to know.
In years past, many people retired with some amount of employer-sponsored retiree health coverage. Today that benefit is much less common. Many employers have dropped subsidized retiree benefits altogether or raised the retiree's premium.
The concept of retirement has also changed. Many are working beyond age 65 and delaying retirement to continue to receive employer-sponsored health insurance. Some say they will never retire.
The Bureau of Labor Statistics says when Social Security was introduced in 1935, the average life expectancy for a 65-year-old was 77 years. When Medicare was introduced in 1965, the average 65-year-old could expect to live to age 79. And recent federal statistics indicate life expectancy continues to rise. In 2010, 65-year-olds were expected to live an additional 19 years to age 84.
All this means that today's workers must change the way they prepare and plan for their future. Health coverage costs will play a major role in the quality of their lives for more years than ever before. The funds to pay for their care will have to come from many sources. These might include fee-for-service Medicare, Medicaid, employer-sponsored retiree plans, private Medicare insurance policies or a combination.
How much will you need?
Here's a sobering statistic from the Center for Retirement Research at Boston College. The average American retiree uses three times as much health care as the average worker.
A leading financial services group issued a recent retirement report. It estimates a 65-year-old couple who plans to retire in 2012 will need to put aside $240,000 or more to cover 15 to 20 years worth of health care. This includes out-of-pocket costs not covered by Original Medicare (Parts A and B). It does not include the cost of long-term custodial care. Keep in mind, $240,000 is an average. If you're in good health you could pay less. If you require extensive care you could wind up paying more.
Samples of out-of-pocket expenses include:
- Doctors' fees
- Hospital stays
- Prescription drug costs
- In-home nursing care
- Medical equipment
- Dental care
- Vision and hearing care
Where will your health care dollars come from?
Almost all Americans age 65 and older qualify for Original Medicare (Parts A and B). This is the government health insurance program. Medicare helps pay for some of your inpatient hospital expenses and outpatient doctor visits. It does not pay for most prescription medications. For most, Part A is premium-free. And for most, Part B comes with an annual deductible and, depending on your income, a monthly premium.
But Original Medicare is just a start. The government program is designed to help pay for some but not all of your health care expenses. Even with Original Medicare you would still pay a coinsurance for many benefits and services.
You may need to enroll in a plan offered through private insurance companies. The plans' benefits and pricing vary. Your out-of-pocket costs will depend on the type of plan you choose,
Let's look at a few plan options:
- Health savings account (HSA). An HSA can be a smart way to fund your retirement health care costs. For starters, you must be in a high-deductible health plan. Start saving early. Try to put away the maximum amount each year and invest it wisely. You could have quite a nest egg by the time you retire. Your deposits are tax-free, but you can't make deposits once you turn 65. Other articles in this website go into more detail about HSAs. Take note, this is not a Medicare plan. It is designed to work in conjunction with a high-deductible health plan offered by your employer.
- Medicare Advantage. Medicare Advantage Plans are sometimes called Part C or MAPD Plans. They are offered by private insurance companies approved by Medicare. The plan provides your Medicare Part A (hospital insurance) and Part B (medical insurance) coverage often for no additional monthly premium. But you must continue to pay your Part B premium. It can help fill in some coverage gaps. Most Medicare Advantage plans include prescription drug coverage, often for no additional monthly premium. With most MAPD plans, you pay a low or $0 monthly premium, and you pay copays or coinsurance only for services you use. Medicare Advantage plans come with an out-of-pocket maximum so you can budget your expenses.
- Medigap coverage. Medigap plans are also called Medicare supplemental insurance plans. They help pay for costs not covered by Medicare Part A and B. You pay a monthly premium that varies based on the coverage you choose. Plan costs vary by state and plan provider.
- Medicare Part D (prescription) coverage. Prescription medications can add up, even if you're using less-expensive generic drugs. A Medicare Part D plan can help you rein in your prescription costs. You pay a monthly premium and a copay or coinsurance for the prescription medications you use that are on the plan's drug list. Premiums, copays and drug lists vary by region and plan provider.
- Long-term care insurance. With good fortune, you'll never need custodial care. But if you do, a long-term care policy could save the day. Most policies cover a variety of scenarios. These include in-home nursing, assisted living and nursing home facilities. But only a fraction of Americans ever use custodial care. This kind of coverage can be very expensive and may not be right for you.
- Investments. Regardless of your health and coverage status, you may need some extra funds on hand for health care. After all, who wants to spend their life savings on medical bills? That's why it's a good idea to consider making some extra investments while you're still working. The sooner you start saving, the better off you should be.
What if you can't afford health care?
Even if you've saved wisely for retirement, things happen. Based on your income and assets you could qualify for a low-income subsidy to help pay for your prescription drug costs. To find out if you qualify, and to apply, check with your local Social Security office.
Medicaid is another safety net established by the federal government. It is run by the states. Let's say you have exhausted your savings and earn less than a specified amount. This program could help pay for your medical costs. Check with your state Medicaid office to see if you qualify.
Assistance programs also exist for veterans, Native Americans and the disabled. Community-level help may also be offered.
Best investments: health, peace of mind
If you hope to cut costs tomorrow, invest today in your good health. Proper diet and exercise can help you cut down on doctor visits. Keep your blood pressure in check. Maintain a healthy weight and change behaviors you know are not good for you.
If you're a smoker, for instance, make a plan to stop as soon as possible. Have regular checkups to help you detect illnesses before they turn into major problems.
Preparing for retirement is a complicated process involving lots of major decisions. It can be stressful and confusing. A qualified financial planner can help you review your options and design a strategy that works for you.
This communication is not intended as legal, financial or tax advice. Please contact a qualified legal, financial or tax professional for advice that takes your personal circumstances into account.
Created on 08/17/2009
Updated on 10/15/2012
- National Vital Statistics Reports, Jan 2012.
- Medicare.gov. Cost of Medicare health plans.
- Fidelity Investments. Fidelity estimates couples retiring In 2012 will need $240,000 to pay medical expenses throughout retirement.
- Center for Retirement Research at Boston College.