Healthcare costs are one of the most important factors to consider when planning for retirement. If you are like most people, you are likely to underestimate these costs.
Don’t Forget Healthcare Costs
Many retirees and those preparing to transition from the workforce to retirement forget to budget for healthcare when estimating their retirement expenses. Why? Employers often bear the majority of the costs (typically around 75%), with the remaining costs (about 20-30%) coming out of their salaries. They believe they will need the same net salary they currently receive, but they forget that they will now be responsible for paying for health insurance premiums as well as out-of-pocket costs.
Understand Health Insurance Premiums
There are five types of health insurance premiums that you are likely to pay in retirement:
- Part B of Medicare: This part increases with income. In 2022, you will pay $170.10 per month if you earned $91,000 or less in 2021. If you earned more, you will pay a higher amount depending on your income level.
- Medigap (Medicare Supplement Insurance) or Medicare Advantage: If you want coverage for costs not covered by basic Medicare, you can purchase either a Medigap policy or a Medicare Advantage plan, in addition to prescription drug coverage. If you have a Medigap policy, it may not cover dental, vision, and eye care costs. Some significant expenses can leave you with high bills, especially related to dental needs.
- Advantage Plan (Part C of Medicare): Medicare Advantage plans include Parts A and B, most also include Part D (for prescription drugs) and options for dental, hearing, and vision care. Medicare Advantage plans may not provide enough additional hospital coverage for long stays or repeated cases. This could leave you and your family with a hefty bill in the event of a chronic or severe illness.
- Part D of Medicare (prescription drug coverage): This category includes self-administered prescription medications. Generally, medications managed by a professional like a nurse or doctor are covered under Part B of Medicare. Those covered under Part D will pay a copayment for each prescription. Additionally, some drugs are excluded from coverage.
- Long-term care insurance premiums: Medicare does not cover most of the long-term care costs you may face. If you want to ensure you have funds to cover these costs, consider long-term care insurance.
Know Your Total Healthcare Costs
Many studies have indicated that total healthcare costs for Medicare beneficiaries are high. A study by the Kaiser Family Foundation found that annual out-of-pocket costs for Medicare beneficiaries were $5,460 in 2016 (about $6,250 adjusted for inflation in 2021). A study by the Center for General Public Policy of the Association for the Chronic Illness showed that the average Medicare beneficiary spent $5,801 on premiums and medical services on average in 2017 (about $6,500 adjusted for inflation).
This information suggests that the average Medicare beneficiary will need to budget nearly $7,000 for their healthcare costs in 2022. Couples with average income will need over $1,100 in savings or available monthly — just for healthcare — to avoid quickly depleting retirement accounts.
These healthcare costs are also likely to increase. The Kaiser Family Foundation predicted that Medicare beneficiary expenses for those aged 65 and over would increase between $2,000 and $4,400 by 2030 compared to 2013 (without adjusting for inflation), meaning you will need to save more when considering rising healthcare costs and inflation.
Visit
Regular Doctor Visits
Many doctors encourage patients to follow a healthy lifestyle to avoid the burden of rising medical bills. Take charge of your healthcare and make sure to visit the doctor regularly. If the doctor can identify any health issues early, he or she can prescribe treatments that may reduce your expenses in the long run. Researching and asking questions helps as well.
You may also want to visit a good dentist and see them every six months to ensure your teeth and mouth are healthy.
Tax-Efficient Distribution Management
High-income individuals pay more for their insurance premiums under Part B and Part D of Medicare. If you earn more than $91,000, you may want to consider working with a good tax or retirement advisor to manage your distributions in a more tax-efficient way. This can help reduce your Medicare insurance premiums as it can keep your taxable income lower.
Distributions from HSA accounts or Roth IRA accounts or from life insurance policies with cash value are not counted in the formula that determines the final amount of Part B Medicare premiums. Income from reverse mortgages is also not counted. Often, you can offset out-of-pocket healthcare expenses with funds withdrawn from traditional retirement accounts.
If you have a significant balance in traditional IRA accounts, it likely means you will have a large amount of required minimum distributions (RMDs) when you turn 72. To reduce your RMDs, you may want to consider converting some of your IRA to Roth before reaching age 65.
Don’t Be Surprised
Increasing healthcare costs will be a reality. Include them in your budget. If you plan to retire early (before age 65), make sure you understand the cost of maintaining your health insurance plan and paying premiums until you reach Medicare insurance age.
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Sources:
- Centers for Medicare and Medicaid Services. “2022 Medicare Parts A & B Premiums and Deductibles/2022 Medicare Part D Income-Related Monthly Adjustment Amounts.”
- Medicare.gov. “What’s Medicare Supplement Insurance (Medigap)?”
- Medicare.gov. “How Do Medicare Advantage Plans Work?”
- Medicare.gov. “Prescription Drugs (Outpatient).”
- Medicare.gov. “Copayment/Coinsurance in Drug Plans.”
- Kaiser Family Foundation. “Medicare Beneficiaries Spent an Average of $5,460 Out-of-Pocket for Health Care in 2016, With Some Groups Spending Substantially More.”
- AARP Public Policy Institute. “Medicare Beneficiaries’ Out-of-Pocket Spending for Health Care,” Page 1.
- Kaiser Family Foundation. “Medicare Beneficiaries’ Out-of-Pocket Health Care Spending as a Share of Income Now and Projections for the Future,” Pages 5, 21.
- Internal Revenue Service. “Retirement Plan and IRA Required Minimum Distributions FAQs.”
Source: https://www.thebalancemoney.com/how-to-plan-for-health-care-costs-in-retirement-2388478
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