October is known for a lot of things, shorter days, cooler temperatures, falling leaves and the arrival of the spice pumpkin everything – from baked goods to coffee, yogurt, smoothies, to beer – and yes, even pumpkin spiced turkey. It also marks the start of Medicare’s annual open enrollment period, which begins October 7 and ends December 15, 2021. Why is this important? Even if you are years away from eligibility, it is essential to understand what Medicare covers and does not cover for anyone saving for retirement. To find out why, grab a cup or bite of your favorite pumpkin spice concoction and read on.
More … than 63 Millions of Americans currently receive health care benefits under Medicare, the federal health insurance program for Americans aged 65 and older and younger people with certain conditions and disabilities. Yet traditional health insurance only covers a portion of your health expenses. What it doesn’t cover can have a significant impact on your retirement income. This is because health care costs remain one of the biggest expenses most people face in retirement. In fact, a to study suggests that the average couple retiring at age 65 in 2021 will need around $ 300,000 in savings (after-tax) just to cover health care expenses in retirement.
The problem is, you are not average. Your costs could easily fall below or well above this amount. So, how to anticipate health care expenses in retirement? The first step is to understand what Medicare covers and what does not.
Reimbursable expenses can add up quickly
Traditional or “original” health insurance includes health insurance Part a (hospitalization insurance) and Part b (medical insurance). Most people don’t pay a premium for Part A, but there are deductibles and limits on what is covered. Many covered services are cost-shared, which means Medicare will pay the approved amount billed by a health care provider and you are responsible for paying the rest. In addition, there is no maximum amount, which can be expensive if you suffer or develop one or more chronic diseases in retirement. In Part B, you pay a monthly premium and a deductible, but again, there is a limit to what Medicare covers. However, there is no limit to the maximum amount you could pay. In addition, some services may not be covered at all, or only partially. This list may change each year, so it’s up to you and your healthcare providers to keep up to date with what is and is not covered from year to year.
Some services that are not covered by traditional health insurance include prescription drugs, dental, hearing and vision care, and long-term care, all of which can be problematic when it comes to managing out-of-pocket expenses. retirement. Indeed, a recent investigation found that 23% of adults aged 65 and over covered by Medicare still had difficulty paying for their prescription drugs. To get prescription drug coverage, you can join a separate plan to get Medicare drug coverage (Part D). Another option is to join a Medicare Advantage or âMedi-Gapâ plan.
Medicare Advantage plans are offered by private companies licensed by Medicare who must follow the rules set by Medicare. Most Medicare Advantage plans include prescription drug coverage, and some include different levels of hearing, vision, and / or dental coverage. Plans may require you to use healthcare providers who participate in the plan’s network and service area for the lowest costs. These plans set a limit on how much you will have to pay each year for covered services, to protect you against unforeseen costs. Although some offer off-grid coverage, it usually comes at a higher cost.
The conundrum of long-term care
One of the most important expenses that retirees can face in their lifetime is paying for long-term care, which is not covered by Medicare. According to US Department of Health and Human Services, a person who turns 65 today is almost 70% likely to need some type of long-term care and support service in their lifetime, and 20% of ‘between them need it for 5 years or more. In addition, women may need longer care (3.7 years) than men (2.2 years) due to their longer average life expectancy.
The costs of long-term care not only add up quickly, but continue to increase year on year. According to an annual report cost of care study, from 2004 to 2020, the average cost of residential and home care services increased, on average, from 1.88% to 3.80% per year. That’s an increase of $ 797 per year for home care and up to $ 2,542 per year for a private room in a nursing home, costing an average of $ 105,850 per year. In comparison, the average annual cost of an assisted living facility is $ 51,600 per year and the annual costs of home helpers have increased to $ 54,912 per year.
Now think about what would happen if one partner needed nursing home care for a period of three years before reaching the end of their life. Based on today’s estimates, that could be as high as $ 306,000 or more. This does not take into account monthly premiums for Medicare Part B or D, or Medicare Advantage Plan, or any other medical expenses the couple pays on an ongoing basis. As a result, the additional expenses associated with nursing home care would place the couple well above the estimated lifetime health costs of $ 300,000 mentioned earlier in this article. It also raises another important concern: what happens when one partner needs more care than the other? Will there be enough money left to pay for the health care of the remaining spouse for the rest of their life? What if they also need long-term care?
These are tough questions to think about, let alone answer. That is why planning for health care costs in retirement should take place as early as possible. But where are you going to start? And how do you anticipate your health needs in 10, 20 or 30 years?
This is where planning comes in. By working closely with an independent financial advisor, you can explore ways to save more now through tax-efficient savings vehicles such as your employer’s pension plan or an Individual Retirement Account (IRA). If you are 50 or over, be sure to take advantage of catch-up contributions. If you currently have a high-deductible health care plan, your employer may offer you a Health Savings Account (HSA). This type of account allows you to contribute while benefiting from a tax deduction. Account income grows tax-free within an HSA, so if the money is ultimately used for qualifying medical expenses, the withdrawal is tax-free. In 2021, the IRS allows individuals to contribute $ 3,600 and families to contribute $ 7,200 to HSAs.
Your advisor can also help you determine if long term care insurance is right for you. Keep in mind that the younger you are when you purchase a policy, the potentially lower the premiums. So if you think this may be an option for you, don’t wait to discuss your concerns with your advisor.
Whether you’re about to retire or already retired, your advisor can help you plan your health care expenses using sophisticated financial planning software. The software runs thousands of potential scenarios to help you identify potential risks while determining the likelihood of achieving each of your goals, including how you’ll pay for health care costs in retirement.
While there is no crystal ball to predict what lies ahead, we do know from recent events that circumstances impacting our health and well-being can change quickly with little warning. . Taking action now to prepare for the future can not only help avoid surprises, but pave the way for a more confident future.
To learn more about planning for health care spending in retirement, download our free guide to Long-term care management in retirement. And if you have questions about whether an HSA is right for you, download our Health savings account worksheet.