Most Americans underestimate their health care costs in retirement, and that’s a problem because those future bills can turn out to be significantly higher than you expect.
A 65-year-old man enrolled in Medicare with a Medigap plan will need to save $166,000 for medical expenses to have a good (90%) chance of covering his projected health care costs in retirement, according to new research from the Employee Benefit Research Institute (EBRI). ), a nonpartisan, nonprofit organization. Due to the longer life expectancy, a 65-year-old woman will need $197,000.
And those may be low estimates, experts say, underscoring the need for workers to focus on ways to reduce those overhead costs or use every tool to save enough.
“Medicare doesn’t cover all health care costs,” Paul Fronstin, director of health benefits research at EBRI, told Yahoo Finance. “As a result, many Medicare beneficiaries buy 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 supplemental coverage and out-of-pocket costs can put a huge strain on the finances of Medicare beneficiaries.”
For seniors enrolled in Medicare Advantage plans, savings targets are typically lower, according to the report. A 65-year-old man enrolled in Medicare Advantage who has average drug spending and average use of health care 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 takes into account a provision of the Reduction of Inflation Act that limits annual out-of-pocket costs for Medicare Part D prescription drugs beginning in 2025 so that no member pays more than $2,000 out-of-pocket per year. .
That cap will affect 50 million Americans with Medicare Part D and may shield enrollees from skyrocketing costs. This provision will directly benefit the 1.4 million Medicare patients who spend more than $2,000 on drugs each year, including people who need high-cost cancer drugs, according to an analysis by the Kaiser Family Foundation (KFF), an organization non profit.
‘Wildly conservative’
It is important to note that 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 for the cost of health care is one of the toughest jobs,” Mary Johnson, a 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 income, just to live on, but we need to plan carefully for much larger sums once we get older and need more care than just medical care. such as paying helpers to help with activities of daily living, cooking, cleaning, or maintaining a home.”
“We are not programmed to think this way,” Johnson said.
It also doesn’t take into account the fact that many people retire before they are eligible for Medicare at age 65 and typically pay out-of-pocket health insurance plan expenses for a few years of retirement. In EBRI’s 2022 Retirement Confidence Survey of 2,677 adults including 1,132 retirees, more than one in 4 (29%) expected to be 70 or older or not at all, but 62 was the reported retirement age by the media.
“These EBRI projections are wildly conservative,” Melinda Caughill, co-founder of the Medicare 65 Incorporated advice website, told Yahoo Finance. Unfortunately, this is just the tip of the iceberg. We’re going crazy in this country because people expect retirement health care to be free and it should be free. But it is not, and it will not be. I wish there was a health care money tree, but there isn’t.”
‘It is not moved by the sun or the palm trees’
These findings, conservative or not, should be a warning to Americans with years to retire to consider contributing to a health savings account (HSA). However, to be eligible, you must be enrolled in a high-deductible health care plan.
By 2023, the inflation-adjusted annual limit on HSA contributions for individual 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 , against $7,300.
Your HSA contribution with your employer can be made through automatic payroll deduction where 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 are not 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 freelancer or business owner.
“From a tax perspective, an HSA is the best thing out there,” Fronstin previously told Yahoo Finance. “It benefits from a triple tax advantage. It is the only account that allows someone to put money in tax-free, accumulate it tax-free, and leave it tax-free for qualified health care expenses.”
Another way to reduce your future health care cost needs is to work longer. If workers who receive health benefits—and a paycheck—from their employer choose to work past age 65 and postpone enrollment in Medicare Parts B and D, they should have saved less than the savings estimated by Medicare researchers. EBRI, according to the report.
However, the number of people 65 and older who are still in work has been on the rise and is projected to rise 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 cut for retirees looking to relocate for their next chapter. Health care costs “vary incredibly depending on where you live,” Caughill said.
In 2022, according to the Missouri Center for Economic Research and Information cost-of-living data series, health care costs in Maryland, for example, were lower than in Florida or Arizona.
“What is $100,000 in Arkansas might be $200,000 in Illinois or Wisconsin,” Caughill said. “Retirees shouldn’t move for the sun or the palm trees, but for the costs of health care.”
Kerry is a senior reporter and columnist for Yahoo Finance. Follow her on Twitter @kerryhannon.
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