Planning for the high cost of health care

When looking ahead and planning for your retirement years, you’ll want to take into account the rising costs of health care. Longevity is a critical factor that is driving these costs. Individuals at age 65 have a high probability of spending 20 years or more in retirement. While Medicare will help, it won’t cover all costs and it’s not available until you turn 65. Here’s how to plan ahead.

A 65-year-old couple, both the median drug expenses, as of 2012 would need $283,000 to have a 90% chance of having enough money to cover health care expenses (excluding long-term care) over their remaining lifetimes1
Medicare coverage and costs
Basic Medicare consists of Part A and Part B. Part A covers inpatient hospital care and is free for most individuals. It helps cover the costs of hospitalizations, but you’ll pay a deductible of $1,216, usually for each hospital admission. Part B, medical insurance, covers doctor visits and outpatient care. In 2014 most new enrollees pay a premium of $104.90 a month and a 20% co-payment after reaching the $147 annual deductible for Part B.

Medicare Part C, or Medicare Advantage plans, are offered by private insurers and usually package traditional Medicare Part A and Part B with extra benefits such as dental, vision, and wellness coverage. With most Medicare Advantage plans, you pay the regular Medicare Part B premium plus an average of $39 a month extra.2 That price will vary depending on where you live and what type of coverage you choose.

Medicare Part D is prescription drug coverage and can be obtained through a Medicare Prescription Drug Plan or a Medicare Advantage Plan that includes drug coverage. These plans are administered by private insurance plans. Different Part D plans cover different drugs so it’s important to review what’s covered before choosing a plan. If you need a drug not covered by your plan, you’re on the hook for its cost.

Because Medicare will not cover all of your medical or prescription drug costs, you probably will want to purchase supplemental, or Medigap, insurance coverage. Medigap is Medicare supplement insurance sold by private insurance companies that can help pay for services and procedures not covered by Medicare Parts A and B. You must already have Medicare Part A and Part B in order to purchase a Medigap policy and will pay a separate premium – in addition to the monthly premium for Part B that you pay to Medicare. Across all plan types, the average Medigap premium was $183 per month in 2010.3
Source: Social Security 2010 tables with 1% mortality improvement.
What if I want to retire early?
Finding interim health insurance, before Medicare kicks in at age 65, is an increasingly common problem. But it’s just one part of the perplexing and costly later-in-life, health care landscape. Whether you think you’ll retire before age 65 or after, the high cost of health care is something to start thinking about now.

If you’re lucky, your employer may offer retiree health care benefits — until Medicare coverage begins — as part of an early retirement package. If not, you’ll have to purchase coverage on your own. Here are some options to consider:

Getting group coverage. If you want to continue working part-time or on a consulting basis, you may be eligible for group coverage at lower rates from a trade or industry organization, or even your alumni association. Also, check with your local chamber of commerce. Many offer group health plans to members. Or try the website of the National Association for the Self-Employed to see if it offers health coverage in your state.
Finding an individual policy. In addition to premium costs, other factors to consider are copays, deductibles and access to medical providers.

In 2014 as a result of the Affordable Care Act, you can now use the Health Insurance Marketplace to buy a plan that meets your needs. Depending on your income and family size, you may be able to get lower costs on your monthly premiums and out-of-pocket costs. The lower your income, the lower your costs. However, you generally won’t qualify for financial assistance if your estimated 2014 income is above:
  • $45,960 for an individual
  • $94,200 for a family of four
When you apply for coverage in the Marketplace, you’ll also find out if you’re eligible for Medicaid.

More information on the Affordable Care Act is available at
Don't forget long-term care
Approximately 70% of Americans now turning 65 will need long term care during retirement.4 Given that average cost for nursing homes is $248 per day and the average monthly rate for assisted living facilities is $3,550, long-term care costs are likely the largest health cost you may face in retirement.4 Ask your financial advisor about long-term-care insurance, one way to pay these astronomical costs — and still leave some money for your heirs.
Time to start planning
Realistically estimating what your health care costs will be down the road — and saving for those expenses — can help make you feel more secure about the future. Talk to your financial advisor about this calculation and perhaps consider increasing the money you’re setting aside as you get closer to retirement age.

Key Points:

  • With the help of a financial advisor, figure out roughly how much you’ll be paying for health care costs in retirement, and plan to save accordingly.
  • In drawing up your retirement budget, consider how much you’ll be paying to cover Medicare’s shortfalls, including the cost of supplemental insurance.
  • If you’re thinking of retiring early — and you won’t be covered by an early retiree package from your employer — explore the health insurance plans that will be available to you.

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