Most Americans underestimate their healthcare bills in retirement, and that’s a problem because those future bills could turn out to be significantly larger than you anticipate.
A 65-year-old man enrolled in Medicare with a Medigap plan needs to set aside $166,000 for medical expenses to have a good chance (90%) of covering his projected health care costs in retirement, according to a new one Research by Employee Benefit Research Institute (EBRI), a nonprofit, nonpartisan organization. Due to the longer lifespan, a 65-year-old woman needs $197,000.
And those could be low estimates, experts say, underscoring the need for workers to either focus on ways to reduce those overall costs or use every tool to save enough.
“Medicare doesn’t cover all healthcare costs,” Paul Fronstin, director of health benefits research at EBRI, told Yahoo Finance. “As a result, many Medicare beneficiaries are buying Medigap or enrolling in Medicare Advantage plans to offset the cost of their own healthcare. They also enroll in Part D plans for prescription drugs. The combination of premiums for supplemental insurance and out-of-pocket expenses can take a huge toll on Medicare beneficiaries’ finances.”
EBRI
For seniors enrolled in Medicare Advantage plans, savings goals are typically lower, according to the report. A 65-year-old man enrolled in Medicare Advantage with average spending on medications and utilization of health care services needs to save $96,000 to have a 9-in-10 chance of paying his medical bills in retirement. Meanwhile, a 65-year-old woman needs $113,000.
The EBRI report also considers a provision of the Inflation Reduction Act that caps annual Medicare Part D prescription drug spending beginning in 2025 so that no participant has to pay more than $2,000 per year out of pocket.
This limit affects 50 million Americans on Medicare Part D and can protect participants from rising costs. According to analysis by the Kaiser Family Foundation (KFF), a nonprofit organization, this provision will directly benefit the 1.4 million Medicare patients who spend more than $2,000 on medication each year, including people who need expensive cancer drugs.
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“Wild Conservative”
Importantly, this EBRI analysis considers the potential costs of long-term care and other bills not covered by Medicare, such as hospital bills. B. dental and ophthalmological care. These are often overlooked in retirement planning.
The EBRI analysis does not consider the potential cost of long-term care expenses and other bills not covered by Medicare, such as B. Dental and eye care. (Getty Creative)
“Health care budgeting is one of the most difficult tasks,” Mary Johnson, policy analyst for The Senior Citizens League, told Yahoo Finance. “Not only do retirees need to save enough to replace about 70% of pre-retirement income – just to live on – but we need to plan carefully for much larger sums as we age and need more care on top of health care. B. to pay helpers to help with activities of daily living, cooking, cleaning or house maintenance.”
“We’re not designed to think that way,” Johnson said.
It also doesn’t take into account the fact that many people retire before they’re eligible for Medicare at age 65, and typically pay their health insurance costs out of pocket for a few years of retirement. In the 2022 EBRI Retirement Confidence Survey of 2,677 adults, including 1,132 retirees, more than one in four (29%) expected to retire at 70 or older or not at all, yet 62 was the median reported retirement age.
“These EBRI projections are extremely conservative,” Melinda Caughill, co-founder of Medicare advice website 65 Incorporated, told Yahoo Finance. “Unfortunately, that’s just the tip of the iceberg. We’re freaking out in this country because people expect healthcare to be free in retirement and should be free. But it isn’t and it won’t be. I wish there was a money tree for healthcare, but there isn’t.”
“Not moving because of sunshine or palm trees”
These results, conservative or otherwise, should serve as a warning to Americans who have years before retirement to consider contributing to a health savings account (HSA).
For 2023, the annual inflation-adjusted HSA contribution limit for the deductible under a high-deductible health plan is $3,850, compared to $3,650 in 2022. The HSA contribution limit for family insurance is $7,750, compared to $7,300.
Your HSA contribution to your employer can be made through an automatic payroll deduction, where funds from your paycheck are funneled into an HSA tax-free. You can also add funds directly to your HSA at any time. Although these contributions are not tax-free, they are deductible on your tax return. Some employers match contributions to HSAs similar to employer-provided retirement savings accounts. You can also open an account as a self-employed freelancer or trader.
“From a tax perspective, an HSA is the best thing there is,” Fronstin previously told Yahoo Finance. “It benefits from a triple tax advantage. It’s the only account where anyone can deposit money tax-free, build tax-free, and pay tax-free for qualifying healthcare expenses.”
Another way to reduce your future healthcare costs is to work longer hours. If workers receiving health care benefits — and a paycheck — from their employer choose to work past age 65 and defer enrollment in Medicare Part B and D, they must have saved less than the EBRI’s savings, according to the report -Researcher.
The number of people over 65 who are still employed has increased and is expected to increase further from an employment rate of 18.9% in 2021 to 21.5% in 2031, according to the Bureau of Labor Statistics. (Getty Creative)
However, the number of people over 65 who are still in the labor force has increased and is projected to increase further from an employment rate of 18.9% in 2021 to 21.5% in 2031, according to the Bureau of Labor Statistics.
Finally, here’s another significant cost reduction for retirees looking to relocate for their next chapter. Healthcare costs “vary incredibly depending on where you live,” Caughill said.
For example, according to the Cost of Living data series from the Missouri Economic Research and Information Center, healthcare costs in Maryland were lower in 2022 than Florida or Arizona.
“What’s $100,000 in Arkansas can be $200,000 in Illinois or Wisconsin,” Caughill said. “Pensioners shouldn’t move for sunshine or palm trees, but for healthcare costs.”
Kerry is a senior reporter and columnist at Yahoo Finance. Follow her on Twitter @kerryhannon.
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