Retirement is supposed to be relaxing and fun – a reward after years of hard work. However, many retirees find that unexpectedly high health care costs take a big bite out of their retirement savings and stress budgets. With average retirement medical expenses estimated at $315,000 for an average retired couple over age 65, having a strategy is key to cover these significant costs.
Out-of-pocket expenses for Medicare premiums, deductibles, copays for doctor visits, lab tests and procedures, dental work, hearing aids, plus long-term care can really add up. Even with Medicare coverage, you still may need to pay over thousands of dollars per year in retirement. Planning ahead and taking advantage of all programs available can be essential to preserving your nest egg.
1. Understand Medicare and Its Limitations
The first critical strategy is to have a solid grasp of what traditional Medicare does and does not cover. Medicare provides vital health insurance coverage in retirement, but it is not a completely comprehensive solution. There are multiple components and gaps to be aware of:
What Parts A and B Cover
Medicare Part A covers inpatient hospital stays, skilled nursing facility care, hospice care and some home health services. Medicare Part B covers doctor visits, lab tests and procedures, preventive screenings, some dental and vision services, mental health care, medical equipment and more.
However, Medicare does not cover other common expenses in retirement like dental cleanings and fillings, dentures, comprehensive routine eye exams and glasses, hearing aids or long term care. You also have to pay deductibles, coinsurance and copays for covered services that can be costly over time.
Out-of-Pocket Costs
Some key Medicare costs retirees need to budget for include:
- Part B Premiums: Most pay over $100 per month depending on income.
- Deductibles:Part A deductible is $1,600 per hospital benefit period. Part B annual deductible is $226.
- Coinsurance: After meeting deductible – you pay 20% of Medicare-approved services under Part B.
2. Supplement with Medigap or Medicare Advantage
To help minimize Medicare gaps in coverage and rising out-of-pocket costs, most enrollees choose additional supplemental insurance. The two main options are Medigap plans or Medicare Advantage plans.
Medigap Benefits and Considerations
Medigap (Medicare Supplement Insurance) plans are sold by private insurance companies and meant to cover cost-sharing associated with Parts A and B – things like coinsurance, copayments, and deductibles. Some benefits of Medigap include:
- Covers expenses Original Medicare does not pay, saving you money
- Gives you flexibility to go to any Medicare-approved doctor or facility
- Provides travel emergency health coverage while overseas
- Premium costs may be cheaper compared to some Advantage plans
- Helps stabilize finances by minimizing unpredictable medical costs
There are regulations on what Medigap plans cover and their pricing structure. As of 2023, Plan G remains one of the most popular and comprehensive choices. Be aware Medigap does not include Part D prescription drug coverage, so you have to enroll in a standalone plan.
Medicare Advantage Plans
Medicare Advantage plans like HMOs and PPOs are an alternate choice offered by private insurance companies approved by Medicare. Some key things to evaluate regarding Advantage plans:
- Often includes added benefits like dental, vision, hearing coverage
- Typically lower premiums but has restrictive provider networks
- May have caps on out-of-pocket spending that provide financial protection
3. Evaluate Prescription Drug Options
Another major medical expense for many seniors is prescription medications used to manage chronic conditions. You have a couple different ways to gain prescription drug coverage with Medicare:
Standalone Part D Plans
You can enroll in a standalone Part D prescription drug plan on top of Original Medicare and any supplementary coverage. Every Part D plan on the market will cover brand name and generic medications, but exact costs will vary. Some factors to compare include:
- Monthly premium amount
- The plan’s deductible and copays/coinsurance
- Which drugs are covered under their formulary
- Pharmacy options like mail order and retail
- Customer service quality and ratings
Plans costs and covered medications can change each year, so it is important to reassess options during open enrollment periods.
Drug Coverage in Advantage Plans
If enrolled in a Medicare Advantage plan like an HMO or PPO, Part D prescription coverage is typically built-in to the plan’s benefits. Formulary restrictions may be tighter compared to standalone plans, but it simplifies administration.
Evaluating both immediate prescription needs plus likely future medication requirements can help guide the ideal drug coverage decision in retirement. Consulting with doctors on this as health changes is wise.
4. Leverage Medicare Savings Programs
In addition to supplemental coverage, there are also government assistance programs that help lower income seniors handle Medicare costs. Medicaid joint programs called Medicare Savings Programs can provide vital financial relief by assisting with expenses like:
- Medicare Part A and B premiums
- Part A and B deductibles
- Coinsurance
- Copayments
The specific benefits you qualify for depend on your income level, assets, and resident state criteria. Some of the main Medicare Savings Programs include:
- Qualified Medicare Beneficiary (QMB): Covers A/B premiums, deductibles and other cost sharing.
- Specified Low-Income Medicare Beneficiary (SLMB): Helps pay Part B premiums.
- Qualifying Individual (QI): Pays just the Part B premium amount.
Beyond cost savings now, these programs safeguard limited assets for future needs. Applying is typically simple through your state Medicaid office and benefits are reevaluated annually. Signing up for a program as soon as eligible is wise.
5. Budgeting for Future Expenses
We’ve covered strategies to minimize current Medicare and prescription drug costs in retirement. However, it is also essential to budget for medical expenses likely to occur in the future:
Long Term Care: Services like nursing homes, assisted living, and in-home health aides are not covered by Medicare or Medigap plans until a certain level of skilled care is reached. The average annual cost for long term care is over $50,000 according to Genworth, making it unaffordable for many. Options to fund include:
- Long term care insurance
- Hybrid policies that combine life insurance with LTC
- Self-funding through retirement savings
End-of-Life Care: While no one likes to think about it, advanced medical care and funeral costs for someone with a terminal illness can also run tens of thousands of dollars without financial planning.
Having an estimate of total projected care costs and a savings strategy makes facing health issues in advanced age less stressful. Consulting knowledgeable retirement advisors is key.
