Most American underestimate their health care costs in retirement and that’s a problem because those future bills may turn out to be considerably higher than you expect.
A 65-year old man enrolled in Medicare with a Medigap plan will need to stash away $166,000 for medical expenses to have a good chance (90%) of covering his projected health care costs in retirement, according to new research from the Employee Benefit Research Institute (EBRI), a nonprofit, nonpartisan organization. Due to longer life spans, a 65-year-old woman will need $197,000.
And those may be lowball estimates, experts say, underscoring the need for workers to focus either on ways to reduce those overall costs or use every tool to save up enough.
“Medicare does not cover all health care costs,” Paul Fronstin, director of health benefits research at EBRI, told Yahoo Finance. “As a result, many Medicare beneficiaries purchase Medigap or enroll in Medicare Advantage plans to help offset the out-of-pocket costs of health care. They also enroll in Part D prescription drug plans. The combination of premiums for supplement coverage and out-of-pocket expenses can put a huge strain on the finances of Medicare beneficiaries.”
For seniors enrolled in Medicare Advantage plans, the savings targets are typically lower, according to the report. A 65-year-old man enrolled in Medicare Advantage who has median drug expenditures and an average usage of healthcare services will need to save $96,000 to have a 9-in-10 chance of meeting medical bills in retirement. Meanwhile, a 65-year-old woman will need $113,000.
The EBRI report also factors in a provision of the Inflation Reduction Act that caps annual out-of-pocket Medicare Part D prescription drug outlays starting in 2025, so that no enrollee will pay more than $2,000 out of pocket per year.
That limit will affect 50 million Americans with Medicare Part D, and may guard enrollees from soaring costs. This provision will directly benefit the 1.4 million Medicare patients who spend more than $2,000 on medications each year, including people who need high-cost cancer drugs, according to an analysis from the Kaiser Family Foundation (KFF), a nonprofit organization.
Importantly, this EBRI analysis does not weigh the potential costs of long-term-care expenses and other bills not covered by Medicare such as dental and vision care. These are often overlooked when planning for retirement.
“Planning the cost of healthcare is one of the hardest jobs,” Mary Johnson, policy analyst for The Senior Citizens League, told Yahoo Finance. “Not only do retirees need to save enough to replace about 70% of pre-retirement earnings — just to live on — but we need to plan carefully for much larger sums once we get older and need more care in addition to just health care, such as to pay for aides to help with activities of daily living, cooking, cleaning or maintaining a home.”
“We are not wired to think this way,” Johnson said.
It also doesn’t take into account the fact that many people retire before becoming eligible for Medicare at 65 and typically shell out for their health insurance plan expenses out of their own pocket for a few retirement years. In EBRI’s 2022 Retirement Confidence Survey of 2,677 adults which included 1,132 retirees, over one in 4 (29%) expect to at 70 or beyond or not at all, yet 62 was the media reported retirement age.
“These EBRI projections are wildly conservative,” Melinda Caughill, co-founder of the Medicare advice website 65 Incorporated, told Yahoo Finance. “This is unfortunately just the tip of the iceberg. We’re freaking out in this country because there’s the expectation for people that health care in retirement is free and should be free. But it’s not, and it’s not going to be. I wish there was a health care money tree, but there isn’t.”
‘Moving not for sunshine or palm trees’
These findings conservative or not, should be a warning for Americans who still have years to retirement to consider contributing to a health savings account (HSA) To be eligible, though, you must be enrolled in a high-deductible health care plan.
For 2023, the annual inflation-adjusted limit on HSA contributions for self-only coverage under a high-deductible health plan will be $3,850, up from $3,650 in 2022. The HSA contribution limit for family coverage will be $7,750, up from $7,300.
Your HSA contribution with your employer can be made through an automatic payroll deduction where the funds are directed from your paycheck, tax-free, into an HSA. You can also add funds directly to your HSA at any time. While these contributions aren’t tax-free, they are deductible on your tax return. Some employers match contributions to HSAs similar to employer-provided retirement savings accounts. You can also open an account as a self-employed freelancer or business owner.
“From a tax perspective, a HSA is the best thing out there,” Fronstin previously told Yahoo Finance. “It benefits from a triple tax advantage. It’s the only account that lets somebody put money in on a tax-free basis, lets it build up tax-free, and lets it come out tax-free for qualified healthcare expenses.”
Another way to lower your future health care cost needs is by working longer. If workers receiving health benefits — and a paycheck — from their employer choose to work past age 65 and postpone enrollment in Medicare Parts B and D, they will need to have socked away less than EBRI researchers’ savings estimates, according to the report.
The number of those 65-and-older still on the job, however, has been on the rise and is projected to increase further from a participation rate of 18.9% in 2021 to 21.5% in 2031, according to the Bureau of Labor Statistics.
Finally, here’s another sizable cost-cutter for retirees eyeing relocating for their next chapter. Healthcare costs “vary incredibly based on where you live,” Caughill said.
In 2022, according to the Missouri Economic Research and Information Center’s Cost of Living Data series, healthcare costs in Maryland, for instance, were lower than in Florida or Arizona.
“What’s $100,000 in Arkansas can be $200,000 in Illinois or Wisconsin,” Caughill said. “Retirees should be moving not for sunshine or palm trees, but for health care costs.”
Kerry is a Senior Reporter and Columnist at Yahoo Finance. Follow her on Twitter @kerryhannon.
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