Healthcare can be one of the biggest expenses you face as you enter retirement. Even with years of saving and anticipation, many older adults aren’t financially prepared for how costly medical expenses can be. The average retired couple’s outlay on healthcare alone is just shy of $300,000 throughout the course of their retirement. While Medicare can relieve some of your own out-of-pocket expenses, it can't cover all expenses. Here’s a look at how to fit healthcare into your retirement budget, what Medicare does and doesn’t cover and other tips for planning and saving.
When considering how much of your retirement income you should budget for healthcare expenses, start by taking your age and personal health into account. This can help you understand how many years of healthcare you may need to cover and how much care you might need.
Remember to also take your Social Security benefits into account in these calculations. On average, adults 65 and older typically spend in the vicinity of $4,000 a month. As of this year, Social Security pays a maximum monthly benefit of $3,148 to retirees who filed at full retirement age (66 years and 2 months).
Of course, it’s important to remember that Social Security benefits are only meant to supplement your own retirement savings, so you may have to look beyond those benefits when it comes to covering your medical expenses. Taking a closer look at your specific Medicare plan and what it covers for you is also crucial to figuring out your retirement healthcare budget.
While Medicare doesn’t cover long-term care, it can pay for some medical expenses. How much it pays for, however, depends mainly upon the plan in which you are enrolled.
• Medicare Part A provides basic hospitalization coverage and is free for most people; however, as of this year, premiums could potentially be up to $471 a month for those that don't qualify for automatic coverage at 65.
• Medicare Part B costs $148.50 a month (sometimes more for high earners) and covers outpatient care such as physician visits and diagnostic tests. Coverage may come with copay and deductible amounts.
• Medicare Part C (Medicare Advantage) is a private option that combines Parts A and B, along with some additional benefits. Medicare pays a fixed amount toward your care each month to the private companies that provide Part C plans. The average cost is $25-30 a month, although it’s possible to get a $0 monthly premium in some areas of the country.
• Medicare Part D costs $41.64 a month and helps cover the cost of prescription drug coverage.
In addition to long-term care, there are some items and services that are not included in any form of Medicare coverage:
• Most dental care
• Eye exams related to lens prescriptions
• Cosmetic surgery
• Hearing aids and exams for fitting them
• Routine foot care
Purchasing a secondary insurance plan to supplement your current medical coverage is a fantastic way to cut medical costs. Secondary insurance plans come in many forms, such as
• Vision care plans
• Dental plans
• Short- and long-term disability plans
• Accidental injury insurance
• Hospital care insurance
• Cancer insurance
• Medicare supplement insurance plans, such as Medigap plans
Gap insurance, or “limited benefits insurance,” is another type of secondary insurance that can offer you cash benefits to pay healthcare costs related to deductibles, copays and other out-of-pocket expenses.
Long-term health insurance policies are designed to provide coverage for long-term care that isn't always covered by insurance, and that also helps protect the financial future of the policyholder and/or any beneficiaries. Long-term coverage plans generally have a tenure of 2-3 years. With these policies, you would be expected to pay a one-time premium up front for the overall tenure of the coverage. While you may think that’s a large sum to pay at once — and a big commitment to a long-term policy — discounts are often applied to the premium simply because of the fact that you’re paying up front, making it the more affordable option in the long run.
With the right amount of preparation, retirement can be a wonderful opportunity to look out over the horizon of your life and reap the rewards of a lifetime of work. Here are some additional tips to bear in mind as you prepare for it.
• Assess your investments and avoid overspending. Estimate how long your retirement savings and income will need to cover your expenses. Do some math to figure out how much you may need to live on each month to ensure adequate savings for the future.
• Take inevitable inflation into account. Remember that the cost of things will likely go up in future years and account for that.
• Take your income level and tax bracket into consideration, and research tax-deferred retirement savings plans that you may be eligible for.