For the average American, health care costs during retirement exceed the total amount of money in their savings account.
And unfortunately, Medicare doesn’t offer a solution.
Healthcare is, of course, the biggest item most retirees need to prepare for. A recent study from the Employee Benefit Research Institute (EBRI) highlighted just how important it is. The institute’s data shows that despite Medicare coverage, retirees still have to pay significant out-of-pocket costs for their healthcare during retirement. These costs cover a range of expenses, including insurance premiums, program deductibles, and prescription drug treatments.
For help planning for your retirement, including paying for your health care, consider hiring a financial advisor.
Healthcare Cost Details
How exactly retiree health care costs can vary. One of the biggest challenges in determining retirement finances is the smoothness of the data. A researcher’s results will change based on mortality rates, local living costs, updated government programs, market returns, and more. The EBRI study attempts to correct for this by using a model that assumes the latest version of Medicare and a large population with varying lifespans based on standard demographics.
In that context, EBRI found that even with supplemental insurance (commonly known as “Medigap” insurance), men need an average of $166,000 in special savings to pay for their health care needs in retirement. For women, with longer expected lifespans, that number jumps to $197,000, and an average of $318,000 for two-person households.
These are large numbers in themselves. What makes the EBRI findings even starker, however, is how they compare to how much people save overall.
The median retirement-age household (65 or older) has $87,725 in total savings. This is supplemented by Social Security income, which varies and pays more to higher-income households. Regardless of the supplemental income, however, most financial experts consider this far too low to cover the average household’s expenses during retirement.
It is also less than half of what a person needs in health care alone.
The Role of Medicare
The reason for this has primarily to do with the Medicare program.
Medicare is known for its simplicity. Many, if not most, Americans believe it is a simple universal health care program for retirees. The reality is that this program does not and has never offered comprehensive health insurance. Instead, it has always been a patchwork of options aimed at paying for hospital stays and the occasional doctor’s visit. While the government has updated some parts of the program over time, such as adding partial payment for prescription drugs through Medicare D, individual retirees have always been expected to shoulder the burden.
Most households cover this through a combination of supplemental insurance, Medicaid (which, remember, is a different program), and (though uncommon) employer health insurance. Together, this creates a potentially expensive network of premiums and out-of-pocket expenses.
The biggest determinant of cost is probably which version of Medicare someone chooses. The program has two versions, known as Traditional and Advantage. Traditional Medicare covers hospital stays, doctor visits, and some drug costs (Parts A, B, and D, respectively). It covers fewer services and involves more out-of-pocket expenses, but it is also accepted by virtually all providers.
Medicare Advantage includes coverage that Traditional Medicare doesn’t, such as more prescription drug and dental coverage. It has lower out-of-pocket costs than Traditional Medicare and more limits on total spending. However, the program is also administered by private insurers, which leads to lower payments and higher overhead, so Advantage is accepted by far fewer providers.
For retirees who can handle the limited choices, EBRI found that Medicare Advantage makes a big difference in total spending. Men who enroll in the program need only about $96,000 to cover their retirement expenses, while women need an average of $113,000. While that’s still more than most people will have in total assets at age 65, it’s significantly less than the money spent by those who enroll in Traditional Medicare.
A financial advisor can help you with Medicare. Find a match with SmartAsset’s free tool.
The big problem
Yet no version of Medicare offers comprehensive health care. From prescription drug costs to long-term care, the program has strict limits. That’s why, as a Kaiser Foundation study found, about 90 percent of all retirees have some form of supplemental health insurance. Low-income retirees may qualify for Medicaid, while many other retirees choose to enroll in third-party supplemental insurance, known as “Medigap.” These are health insurance programs that cover costs that Medicare typically omits, and they typically have premiums ranging from about $130 to $300 per month.
No matter what you choose, all retirement health plans come with additional costs. Even Medicare itself requires deductibles, co-pays, and premiums, many of which come as a surprise to retirees who expect it to provide completely free health insurance. Supplemental insurance requires out-of-pocket costs, most Medicaid programs require some form of patient contribution, and often a retiree will need treatment that no program covers.
It’s adding up, and EBRI expects these costs to only continue to rise. As health care costs rise, life expectancies grow longer, and both employers and the government consider cuts to traditional benefit programs, many households will need to prepare for health insurance that will eat into their retirement accounts more than ever before. Consider talking to a financial advisor about projections and options for your retirement.
The heart of the matter
A new study from the Employee Benefit Research Institute shows hard data on the cost of healthcare in retirement that is higher than the average retirement account combined.
Tips for retirement planning
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Medical expenses are, for the most part, non-negotiable expenses during retirement, so any good retirement plan should calculate exactly how much you’ll have left after you pay the doctor.
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A financial advisor can help you plan for your own retirement needs. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisors for free to determine which one is the best fit for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid—in an account that isn’t subject to big swings like the stock market. The tradeoff is that the value of liquid assets can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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The post Health Care Will Cost More Than Most Retirees Have: Why Medicare Isn’t the Answer appeared first on SmartAsset Blog.
