Hoping to retire soon when you reach the age of 65? How much should you be saving for health care expenses that won’t be covered by Medicare?
There are many unknown factors when it comes to predicting individual health care costs, but the one thing we can pretty much count on is health care inflation. According to Standard & Poor’s, costs for health care went up by more than 5% in 2012, while the Consumer Price Index—a common measure of inflation—rose less than 2%.
In December 2010, the Employee Benefit Research Institute (EBRI) estimated that a couple with median drug expenses would need to save $271,000 in order to have a 90% chance of covering their projected health care costs in retirement. That may sound like a big number, but when you consider that it translates to an annual cost of $13,550 for 20 years, it’s more realistic. Here’s how to plan.
Start With Medicare Costs
Some people are surprised to find that Medicare isn’t entirely free. Most people won’t pay a premium for Medicare Part A—which covers hospital care, home health services and care at a skilled nursing facility—but hospital stays have a $1,184 deductible, plus a co-payment for stays over 60 days. For 2013, monthly Part B premiums (for doctor’s visits, lab tests and supplies) range from $104.90 to $335.70, depending on your income and tax filing status. For some doctor’s visits, there is a $147 deductible plus co-payments.
You will also pay for a Part D prescription drug policy. The base monthly premium depends on your plan and your income, but averaged about $40 a month in 2012. Depending on your plan, you may have to cover deductibles and co-payments.
Then, there’s the “doughnut hole”—the gap in coverage once drug costs reach a certain dollar amount ($2,970 in 2013), after which you pay a higher percentage for prescriptions until you hit the annual out-of-pocket maximum, which is currently $4,750. Fortunately, under the Affordable Care Act, the size of the doughnut hole will decrease yearly until it ultimately closes in 2020.
Factor in Supplemental Insurance
Because Medicare doesn’t cover everything, the next potential cost to consider is supplemental insurance. You must be enrolled in both Medicare Parts A and B to qualify for either of the following:
Medigap Policy. Sold by private insurance companies, Medigap pays for the cost of co-payments and deductibles, but it generally doesn’t cover prescription drugs, dental expenses or vision expenses. While Medigap plans and coverage are regulated by federal and state laws, plan costs vary depending on where you live and the type of policy you choose. Prices can range from less than $50 to more than $300 a month.
Medicare Advantage Plan. Called Part C, this is an alternative way to receive Medicare benefits, and can be structured as an HMO or PPO. Medicare Advantage Plans are offered by private insurance companies and must include all benefits provided under Medicare Parts A and B. Like Medigap policies, these plans vary in terms of cost, services, deductibles and co-payments. While generally less expensive than Medigap plans, they can run higher than $50 a month, so it’s wise to research what’s available in your area.
Remember, premiums for supplemental insurance can vary and are in addition to monthly premiums for Medicare itself.
Add What Medicare Doesn’t Cover
Many services—such as dentistry, hearing aids and long-term care—likely won’t be covered by either Medicare or your supplemental insurance.
If you don’t have long-term care insurance (LTCI), it merits some thought. Most people don’t realize that Medicare only pays for medically necessary skilled nursing and home care, such as changing dressings, not “activities of daily living” like bathing and eating.
Premiums for LTCI go up as you get older or as your health declines, so purchasing a plan when you’re between the ages of 50 and 65 is generally more cost-effective, provided you’re in good health. LTCI is not inexpensive, but it can help protect your retirement assets down the road.
Make Health Care a Part of Your Retirement Budget
Looking at these costs in light of your own health, your family’s history of longevity and your current retirement savings will give you an idea of how much more you need to save. One effective way to plan for medical expenses is to contribute the yearly maximum to a Health Savings Account (HSA), if you have one, and get a tax benefit at the same time.
With health care expenses going up, my advice is to consider health care as a significant item in your retirement budget and save as much as you can. Then, hopefully, you can relax and enjoy a long and healthy life.
Don’t Miss the Medicare Enrollment Window
As you approach age 65, make sure you’re enrolled in Medicare. If you’re already collecting Social Security, you’ll be automatically enrolled in Parts A and B (and your monthly premium will be withheld from your benefit check). But if you’re not, you have a seven-month window (three months before and after the month you turn 65) to sign up and avoid a late enrollment penalty.
Taken from an article by Carrie Schwab-Pomerantz, CFP®, President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.