Why Retirees Can’t Rely on Medicare for Healthcare Expenses

For the average American, health care in retirement will cost more than they have in their entire savings account.

And unfortunately, Medicare won’t help.

Healthcare, of course, is the biggest line item most retirees have to prepare for. Recently, a study published by EBRI (Employee Benefit Research Institute) highlighted how important this is. The institute’s data finds that despite Medicare coverage, retirees should expect to pay significant out-of-pocket costs for health care during retirement. These costs cover a range of expenses, including insurance premiums, program deductibles and prescription drug treatments.

For help with retirement planning, including how to pay for health care, consider working with a financial advisor.

Details of healthcare costs

Just how health care costs for retirees can vary. One of the biggest challenges in setting retirement finances is the slippery nature of data. A researcher’s results will change based on mortality assumptions, local costs of living, updated government programs, market returns, and more. The EBRI study attempts to correct for this by running a model that assumed the latest version of Medicare and a large population with different life expectancies based on standard demographics.

Against this background, EBRI found that even with supplemental insurance (commonly known as “Medigap” insurance), men will need, on average, $166,000 in dedicated savings to pay for their health care needs in retirement. For women with a longer life expectancy, that number rises to $197,000 and an average of $318,000 for two-person households.

Those are big numbers on their own. However, what makes EBRI’s findings even more serious is how it compares to how much people have in total savings.

The average household at retirement age (65 or older) has total savings of $87,725. This is supplemented by Social Security income, which varies and pays more to households with higher incomes. Regardless of the additional income, however, most financial experts believe this is far too little to cover the costs of the average household in retirement.

It’s also less than half of what someone will need for health expenses alone.

The role of Medicare

Much of the reason for this has to do with the Medicare program.

Medicare has a reputation for simplicity. Many, if not most, Americans believe this is simply a universal health care program for retirees. However, the reality is that this program does not and has never offered comprehensive health insurance. Instead, it’s always been a patchwork of options focused on paying for hospitalization and the occasional doctor’s visit. Although the government has updated some parts of this program over time, such as adding a partial payment for prescription drugs through Medicare D, it has always been expected that individual retirees would take the plunge.

The story continues

Most households cover this through a combination of supplemental insurance, Medicaid (which, remember, is a different program), and (though less common) employer health insurance plans. Together, they create a potentially costly web of premiums and out-of-pocket expenses.

Probably the biggest determinant of costs is the version of Medicare that someone enrolls in. The program has two versions, known as Traditional and Advantage. Traditional Medicare includes hospital stays, doctor visits, and some drug costs (Parts A, B, and D). It covers fewer services and includes more out-of-pocket expenses, but is also accepted by almost all providers.

Medicare Advantage includes coverage that traditional Medicare does not, such as more prescription drugs and dental coverage. It has lower out-of-pocket costs than traditional Medicare and more limits on out-of-pocket expenses. However, the program is also run by private insurers, resulting in lower payouts and higher overall costs, so Advantage is also accepted by far fewer providers.

For retirees who can handle the reduced choice, EBRI found that Medicare Advantage makes a big difference in overall costs. Men enrolled in this program only need about $96,000 to meet their retirement spending needs, while women need an average of $113,000. While that’s still more than most people have in total assets at age 65, it’s significantly less than what traditional Medicare enrollees spend.

A financial advisor can help you navigate Medicare. Get fit with the free SmartAsset tool.

The Big Problem

However, no version of Medicare provides full health care. From drug costs to long-term care, the program has strict limits. That’s why, as a Kaiser Foundation study found, about 90 percent of all retirees have some form of supplemental health plans. Low-income retirees may qualify for Medicaid, while many other retirees choose to enroll in third-party supplemental insurance plans known as “Medigap.” These are health insurance programs that cover costs that Medicare typically leaves out and tend to have premiums between $130 and $300 per month.

No matter what you choose, all retirement health plans come with additional costs. Even Medicare itself requires deductibles, copays, and premiums, many of which come as a surprise to retirees who expect it to provide completely free health insurance. Supplemental insurance requires out-of-pocket costs, most Medicaid programs require some form of patient contributions, and often a retiree will need treatment that no program covers.

They add up, and EBRI expects these costs to only continue to rise. As health care becomes more expensive, life expectancy gets longer, and both employers and the government consider cutting back on traditional benefit programs, many households will need to prepare for health insurance to eat more out of their bill of retirement than ever before. Consider talking to a financial advisor about your retirement projections and options.

conclusion

A new study by the Employee Benefit Research Institute has some hard numbers on how much it will cost to pay for your health care in retirement, costs that are higher than the average retirement account in its entirety.

Retirement Planning Tips

• Medical expenses are, to a large extent, non-negotiable expenses for retirement. So any good retirement plan should calculate exactly how much you have left after paying the doctor.

• A financial advisor will help you plan for your own retirement needs. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can interview your advisor matches for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals , get started now.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

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