Healthcare costs in retirement: known as the BIG UNKNOWN of retirement finances. Even among folks enthusiastic and knowledgeable about personal finance, I found this subject broached with some trepidation.
Turns out, it may be less daunting than initially expected. Make no mistake, it is a sizable chunk of change. Plus, it remains the most uncertain component of retirement planning. But we can try and make some headway.
An Idea of HealthCare Costs
As a family of four, we buy our health insurance on the individual/small business market, being a couple of self-employed docs. On a HSA-eligible high deductible plan, our premiums are $14000 a yr and out of pocket (OOP) max for the family is $13000 in 2019. This brings up the total to $27000 a yr on healthcare. Hopefully, we will not reach OOP max every year if only the kids can keep themselves from falling off couches or getting tangled in their own feet. But for budgeting purposes, you have to consider the total of premiums + OOP for each year.
Most employed folks pay only about 25% of their healthcare costs- the rest of the tab is picked up by their employers. Even that small percentage gets taken off their paychecks before it comes to them. So, it is a sticker shock to most people who are looking into their true healthcare costs for the first time.
What Do Retirement Healthcare Costs look like?
To begin with, there are 2 camps we need to talk about separately: Early Retirement and Traditional Retirement.
Healthcare Costs in Early Retirement
With early retirement, you are likely years away from Medicare eligibility (65 yrs). So what are your options?
- You may be among the lucky few (and becoming fewer still by the year) who will get some or all of their healthcare as part of retirement benefits. Then you are golden and can skip the rest of this post.
- Go on a spouse’s employer-sponsored insurance plan. This is often, but not necessarily the least expensive option- explore your options so you can choose wisely.
- For the first 18 months after leaving a job, you can use COBRA- which basically means you stay on the employer-provided plan but the employer no longer subsidizes it for you.
- Beyond this, your usual option is the open Health Insurance Market- either the private insurances or the ACA Marketplace.
If based on your Modified Adjusted Gross Income (MAGI) and number of persons in the household, you are eligible for subsidies, it may be worthwhile to check on the ACA Marketplace/ Health insurance Exchange.
Premiums on individual plans cannot be tiered based on pre-existing conditions but do increase with age of the insured.
Browse around on eHealthinsurance.com or goHealthInsurance.com to compare prices in the individual market. Going with a broker is also fine- they are paid by commission from the insurance companies. Just be mindful of the usual conflicts of interest.
Some other options to consider
- With the repeal of the Obamacare Individual Mandate, Catastrophic Plans and Short-Term Plans are back in the fray. Physician on Fire wrote on this subject here. These may be viable options for early retirees without chronic conditions and those who can cash-flow the high deductibles. They are not ACA-compliant and therefore not required to provide comprehensive care. They can also exclude persons with pre-existing conditions and charge more for sicker than healthier people.
- Association Health Plans may become a viable option if regulations allow. Individuals or small businesses in a particular region or that belong to a professional/trade association may be able to band together to buy insurance- giving them strength in numbers. They may also cross state lines, bringing greater choice to a region. Since they are exempt from the comprehensive coverage requirements of ACA, coverage and consumer protection may differ. Tread carefully.
- Health sharing ministries may be another- that White Coat Investor wrote about here.
Healthcare Costs in Traditional Retirement
This assumes you retire at age 65, when you become eligible for Medicare. So, you are looking at lower costs than early retirement, at least the way things stand now.
An Introduction to Medicare
Medicare has 4 parts to it.
- Part A: pays for hospital admissions. It is “free” to beneficiaries since they or their spouses have paid into it during their working years.
- Part B: pays for outpatient doctor visits, labs etc. Parts A and B are together called Original Medicare.
- Part D: pays for prescription drug coverage.
Beneficiaries pay premiums on Parts B and D. Part D premiums vary by state. Premiums are higher for higher income individuals in the form of surcharges.
Supplemental Coverage
To keep these out of pocket costs lower or more predictable, you can get supplemental insurance:
- Medigap policies (Part C): There are 10 of these policies nationwide, though not all are available in all areas. They do have slightly higher premiums but lower overall out-of pocket costs. That makes them a good option for those with chronic conditions requiring sizable healthcare usage. Wider choice of physicians/hospitals with no network restrictions. No drug coverage, so you need to purchase Part D coverage for medications.
- Medicare Advantage Plans are private insurance policies. Slightly less expensive premiums but may have overall higher OOP costs. Better option for those who are healthier and expect not to utilize much healthcare. They have additional drug coverage which may turn out cost-effective in comparison to Medicare Part D.
Medicare covers only a part of all costs. The rest (deductibles, copays, coinsurance) comes from enrollees (cost-sharing). So, your total healthcare costs include premiums + cost sharing + the stuff that Medicare doesn’t include: dental, vision, hearing. And the biggie: Long term care- that we’ll talk about in a bit.
This does seem like a lot of things to cover out of pocket but the costs are significantly lower than the individual health insurance market. For e.g., in 2019- Parts B and D premiums are a total of $2000 annually (nationwide average). So, if working at least part-time to age 65 in order to stay on an employer’s health plan is an option, it does save you a ton of money.
Scary Stats
Fidelity, which puts out the best-known annual survey on this subject, estimates that a 65-yr old couple, retiring in 2019 will need $285000 in savings to cover their healthcare needs throughout retirement, compared with $280,000 in 2018. For single retirees, the health care cost estimate is $150,000 for women and $135,000 for men (thanks to higher longevity).
HVS financial has a higher estimate: An average healthy 65 yo couple in 2019 will spend $394000 in retirement for healthcare costs, including premiums and OOP costs.
These estimates:
- use present-value dollars
- assume no income-related Medicare premium surcharges
- include premiums for Parts B, D and supplemental insurance: national averages for those that vary regionally
- include all estimated OOP costs for hospitalizations, outpatient services, vision, dental and hearing
- assume projected life expectancy of 87 yr (male) and 89 yr (female)
- exclude Long Term Care expenses.
We will stop here for this post and break down what these numbers mean in Part 2.
