Planning for 6 Medicare costs you may have overlooked

A senior man with glasses collects his mail at the mailbox and looks through it.

Saving for retirement can be a challenging task and many people are short of where they need to be. Leading financial experts including Barron’s report that "healthcare can be one of the biggest expenses in retirement."1 They continue to examine the rising costs and their impact on retirement. Fidelity Investments' latest study puts the cost of healthcare for a couple both aged 65 at $260,000. This is up from $245,000 in the 2015 study and $220,000 in the 2014 study.2

Per US News & World Report, the six largest costs for retirees are:3

  1. Housing
  2. Healthcare
  3. Taxes
  4. Transportation
  5. Travel
  6. Caring for their kids

Looking at healthcare specifically, Fidelity groups the largest retiree healthcare costs into three major categories:4

  • Coinsurance, copayments and deductibles consume about 40 percent of retiree healthcare spending.
  • Premiums for Medicare Parts B and D consume another 36 percent of retiree healthcare costs.
  • The remaining 24 percent goes to out-of-pocket expenses for drugs not covered by Medicare Part D. This includes coinsurance, copays and deductibles. In addition, this includes items such as supplements and other over-the-counter medications that are not covered.

In addition to these three broad groups, items not covered by Original Medicare can be another significant healthcare expense for retirees impacted by these issues. Hearing aids and related care, dental care and vision care are among this group of items not covered.5

Factoring in Medicare Advantage

The good news is that some or all of the costs listed above may be covered by a Medicare Advantage plan. It is not uncommon for a Medicare Advantage plan to cover some dental, vision and hearing-related costs and other services and procedures not covered by Original Medicare. Many offer additional services that can range from wellness programs to gym memberships.

Medicare Advantage plans encompass all of the services covered by Original Medicare Parts A and B, plus many include a prescription drug plan. Many Medicare Advantage plans offer low or zero monthly premiums. Additionally, many offer various forms of coverage such as a preferred provider organization (PPO), health maintenance organization (HMO) and other popular formats.

Long-term care

Long-term care is another potential major retiree health-related expense. The 2016 Fidelity retiree healthcare cost study indicated that an average couple would need an additional $130,000 in retirement savings to insure against long-term care costs if needed.

The assumption is that the couple purchases a long-term care policy with an $8,000 monthly benefit with three years' worth of coverage, assumes an inflation adjustment rider of 3 percent and assumes the couple is in good health at the time.

Preparing for the impact of healthcare costs in retirement

According to HealthView Services, a company that provides retiree healthcare data to financial advisors, today's 45-year-olds should plan to spend an amount equal to 116 percent of their anticipated Social Security benefit on healthcare costs.6

What can pre-retirees do to help cover these costs?

A health saving account (HSA) is a great way to save for the cost of healthcare in retirement if you have access to one. For 2017 a single person can contribute as much as $3,400 with a $6,750 family limit. Those 55 and older can add an additional $1,000. These contributions are made on a pre-tax basis providing a current year tax savings as well.

The real opportunity is for those who can cover all or most of their out-of-pocket medical costs from other sources while they are working. HSAs are portable and the money can be carried over year after year if not used.

The money can also be invested much like an IRA account to allow for growth until needed in retirement. The money can then be used tax free to pay for qualified medical expenses in retirement.7

Financial experts advise there are additional things you can do to help control costs and better plan for retirement.8 They include:

  • Adopt and maintain a healthy lifestyle including exercise and a healthy diet. This can help positively impact your healthcare needs. Build a relationship with your doctor, take advantage of preventive care and get regular checkups.
  • Work with your financial advisor to help plan expenses. Timing can help maximize tax deductions for things like an extra pair of glasses. You should never put off necessary medical care.
  • Be sure to compare all your options to ensure that the plan you choose provides the coverage you need within your budget. Think about your current healthcare needs and how they may change in the future.
  • Understand what plans cover and what they do not. Some plans may not include coverage for services or medications that you may need.

Be proactive in planning for the high cost of healthcare in retirement. Don't go into retirement with your eyes closed; confront this issue head-on and ideally well before you retire.

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