Author: Nick Prigitano
We all see the startling headlines about how much healthcare costs and that it is continually going up. Fidelity recently came out with a study that estimates that a 65 year-old couple who retired in 2018 can expect to spend around $280,000 for health related expenses in retirement!1 This leaves many pre-retirees wondering, how am I ever going to afford that along with all my other expenses? While this number is nothing to scoff at, another study from Vanguard and Mercer makes some interesting points as to why we maybe shouldn't be as stressed as we are about affording healthcare in retirement.
What makes up my healthcare costs?
While healthcare expense numbers appear astronomical, many of the expenses are paid without people even realizing it. It's a common misconception to think of healthcare costs as the out of pocket amounts you pay for medical services when visiting the doctor. However, much of the cost are the premiums people pay for their insurance. For those on Medicare part B, the premium is normally taken right out of your Social Security check so you don't even notice it. When trying to grasp the size of these numbers, it's important to note that the costs include the insurance too, not just receiving medical services.
How much can I expect to pay annually?
The flaw that the Vanguard Mercer study found with a lump-sum number for expenses is that it's not entirely realistic. No one pays all of their expenses up front, but on an ongoing, annual basis. When planning annually for expenses, including medical, the numbers become much more manageable and easier to plan for. In the study they found that a medium risk, 65-year-old woman could expect to pay around $3,800 annually on traditional Medicare (this includes premiums and out of pocket expenses).2 While no one likes to dole out money for health care expenses, $3,800 is a much easier number to chew than the whopping $280,000! What's also important is that this number is easier to plan for because it's on an annual basis and not a lump sum figure.
What can change the expected expense amount?
There are numerous factors that can change the amount someone can expect to pay for health related expenses. For starters, having a spouse will more or less double the cost. However, the biggest factors that impact costs are your health, your income, and the coverage you purchase.
1: Your Health
It's no surprise that the healthier you are, the less you can expect to pay for services. The more chronic medical conditions you have (high cholesterol, diabetes, asthma, etc.) the more you are likely going to need medical services, and thus, the more you are likely to pay. While no one wants to have chronic conditions, the good news is that if you do have some before you retire, this is another area that can be planned for. Since your expenses are likely to be higher, a financial planner can include this in their calculations for your healthcare costs over time.
2: Your income
The vast majority of people over the age of 65 receive their health insurance through Medicare. Medicare part A is free, but the cost of Medicare B is based on the amount of income you have. The more you earn (including investment income) the higher your premiums are going to be. Since the IRS does not have a crystal ball and doesn't know what your income will be in 2019, or what it was in 2018, they base the premium amount off your tax return 2 years ago (2017). As a married couple, if you had income over $170,000 the monthly premiums jump from $135.50 per month to $189.60.3 From there costs continue to go up in stages as your income increases. It is a common financial planning strategy to try and keep clients below thresholds if they are close, because $1 over increases the whole premium. The brackets are all or nothing.
3: Your coverage
While Medicare parts A, B and D cover much of people's medical needs, there are still gaps in coverage. That's why it's generally advisable to purchase Medigap coverage to fill these holes. However, there are numerous choices as to what coverage to get, all with their benefits and downsides. Plan F was one of the most popular, but is going away in 2019 leaving many pre-retirees the stressful decision of choosing which plan is best for them. The more a plan covers the higher the premiums will be. But as you do need medical services, you will normally pay less out of pocket. This is another crucial planning area because choosing the right gap-coverage can have a monumental impact on the overall cost of medical expenses.
Medical costs are a big part of people's overall retirement expenses. But a little planning can go a long way. Breaking down the lump-sum figure into an annual amount makes the expense easier to plan for and more predictable. Also, knowing if you're at a higher-risk for incurring healthcare costs can help the planning process. However, most importantly you want to make sure you are enrolling in Medicare when eligible, and that you are choosing a Medigap plan that covers your needs. Enlisting the help of a financial advisor can guide you in the right direction so that nothing falls through the cracks.