What portion of your retirement assets will go toward healthcare costs? You may need to increase that amount, because Medicare may not have you entirely covered. From age 65 on, the average couple spends about $288,000 on healthcare needs above and beyond what Medicare pays, assuming the husband lives to age 85 and the wife to age 87. Understanding what goes into this big number can help you prepare to manage it.
Let’s start here: Medicare is not free. Although there's no charge for Part A, which covers hospital care, Part B (for doctors' services) costs most beneficiaries $121.80 a month. (High-income retirees pay a surcharge that can drive the monthly premium up to $389.80 a month.) Not counting the annual deductible or annual increases in premiums and assuming our hypothetical couple above isn't subject to a surcharge, Medicare B premiums over their projected lifetimes could total more than $58,000.
Many seniors also buy a Medicare supplementary, or "Medigap,” policy to cover some of the bills that Medicare doesn't pay. According to planprescriber.com, the premium for one of the most popular plans, Plan F, ranges from $150 to $271 per month in the Pittsburgh area. Assuming the couple pays $150 a month, that’s another $66,600 in insurance premiums over their presumed lifetimes.
Don't forget prescription drug coverage: If our hypothetical couple buys the popular Medicare Plan D drug policy, they’re adding almost $60 a month to each of their premiums.
Altogether, the premiums alone could amount to $153,400 over the couple's lifetimes. That is a significant amount to devote just to healthcare when you look at it as a lump sum. But remember that these projected costs would be spread over a 20-year period; $288,000 averages out to "just” $13,000 a year. That's still a lot – but with careful planning, it is manageable.
Start exploring your funding options with these tips:
Make the most of your Social Security retirement benefits. You may already have one source of funds that could pay that annual bill: Social Security. Say that each spouse was due $2,200 a month from Social Security at their full retirement age of 66. (The maximum benefit for someone retiring in 2016 is $2,639.) That's $26,400 a year each, for a total of $52,800.
If you wait to claim, the 8% (or so) increase that your benefits see each year between age 62 and 70 offers such a sizeable advantage that you may want to consider delaying, even if it means dipping earlier and deeper into your nest egg than you had planned. You can make reduced demands on it later. If our couple were to postpone claiming benefits until age 70, delayed-retirement credits could boost their benefit to as much as $2,860 each, for an annual total of $68,640. Over their projected life expectancy, that would total more than $1 million (not counting any cost-of-living increases).
Use the Social Security Administration calculators at SSA.gov to see exactly how much your age-66 benefit would be reduced or increased based on how many months before or after your full retirement age you start your benefits.
Weigh the HSA option. If you're still working and your employer offers a high-deductible medical plan with a health savings account option, consider whether it makes sense for you. You can use it to cover out-of-pocket medical expenses now or let the account grow tax-free. The funds you withdraw will be tax-free when used to cover qualified medical expenses. Visit IRS.gov and refer to Publication No. 502 for more information.
Invest for the long haul. Are your investments positioned to keep up with inflation? The cost of medical care is likely to continue increasing faster than the general cost of living. While the consumer price index has averaged a 3.7% annual increase since 1947, it is estimated that the medical care component will continue to rise (6.5% in 2017) – and increased access to care nationwide will drive that figure higher.
You can't do much about the likelihood that healthcare costs will climb. But by understanding what's ahead, you can make smart choices now that will help you prepare to manage this major expense as just another part of your retirement.
1. HealthView Services: 2016 Retirement Health Care Costs Data Report.
2. Part B Costs, Medicare.gov. http://www.medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html (accessed on Aug. 21, 2016)
4. Plan Prescriber ratefinder https://www.planprescriber.com/medigap/ (accessed on Aug. 21, 2016)
5. Social Security Administration. Frequently Asked Questions # 3735. Last Modified Feb. 24, 2016. https://faq.ssa.gov/link/portal/34011/34019/article/3735/what-is-the-maximum-social-security-retirement-benefit-payable (accessed on Aug. 21, 2016)
6. Social Security Administration. Early or Late Retirement Calculator. https://www.ssa.gov/OACT/quickcalc/early_late.html (accessed on Aug. 21, 2016)
7. Federal Reserve Bank of Minneapolis. Consumer Price Index, 1913-. https://www.minneapolisfed.org/community/teaching-aids/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913
8. PwC. Behind the Numbers 2017. http://www.pwc.com/us/en/health-industries/health-research-institute/behind-the-numbers.html
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