Managing Health Care Costs in Retirement

Managing Health Care Costs in Retirement

December 15, 2017

Retirees today are facing a whole new set of financial challenges, which makes planning for retirement all the more important. In calculating the cost of retirement, the equation has become much more complex due to the reality of living longer. With longer life spans, come higher health care costs, which are often unaccounted for in the planning process. According to Fidelity Benefits Consultants, a 65-year old couple retiring today can expect to spend $240,000 on future medical costs, including deductibles, co-pays, premiums for optional coverage, prescription drugs, dental work, hearing aids and other expenses not covered by Medicare. And, that doesn’t include the cost of long-term care which can run between $70,000 and $100,000 a year.

Planning for retirement today has to include realistic assumptions about your health care needs. While there is really no way to know what your actual medical needs will be in the future, you can make some assumptions based on your preexisting conditions, lifestyle choices and your ability to stay in good physical and mental condition. If you are in excellent health at age 65, you can expect to incur much lower costs than someone with medical concerns such as diabetes or osteoporosis. However, you are more likely to eventually need more years of long-term care. The best you can do is plan for the likely out-of-pocket costs of health care and then proactively manage your health care costs in retirement.

Good Health Equals Lower Medical Costs

The biggest component of managing your health care costs is your personal health. Maintaining an active lifestyle, finding ways to continuously exercise your mind and body, and eating healthy can have the greatest impact on your health care costs – so much that, for an increasing number of retirees, 80 is becoming the new 60. You can’t always control medical conditions that might arise, but a healthy body is better able to stave off illnesses and prevent injuries. At a time when health care costs can consume a big part of your budget, your health is a much of an investment in your future as stocks and bonds.


Understanding the Medicare Puzzle

At the center of your health care cost management is your Medicare plan. Signing up for Medicare is not quite as simple as signing up for a private health insurance plan. There are four parts to Medicare and several ways to combine them that produce different cost outcomes. The key is to have a clear idea of your health needs before exploring the options.

Medicare Part A is easy. It’s free (no premiums) and it covers all of your hospital care. It will also cover skilled nursing, hospice and some home health care. There is a deductible cost of $1,316 in 2017, but if you require an extended hospital stay, a per day co-pay is charged -- $329 per day between 61 and 90 days and $658 per day beyond 90 days per benefit period.

Medicare Part B is optional and there is a premium cost. But, it is important because it covers medical treatments and services, including, outpatient services, medically necessary services and preventative services. This includes all doctor visits. If you have other coverage for these services you can opt out of Part B, but there is a late enrollment penalty should you decide later that you need it. The average monthly premium for Part B, which can be purchased from competing insurance providers, is $109 a month. The annual deductible in 2017 is $183.

Medicare Part C is purely optional, but it can save you money. Also referred to as Medicare Advantage Plans (MAP), these plans are offered by private insurers and they combine Parts A, B, and D (prescription drugs). The plan will also cover many of the co-pays for Part B treatments. It’s a great way to reduce the costs and hassles of managing your Medicare plans. Premiums can range from $0 to $300 depending on the range of coverages you include and whether you choose an HMO or a PPO. But, $0 premium does not usually mean it’s free. Plans with lower premiums typically charge higher co-pays. The average MAP premium is typically lower than the combined premiums you pay for Parts B and D.

Medicare Part D is for prescription drugs and the current premium varies by plan. The average premium in 2016 was $34.

Putting it all together and, depending on your combination of plans, your basic Medicare costs will be in the range of $3,100 and $4,000 assuming you pay the full deductibles.

You can’t forget uncovered medical expenses, such as vision care, hearing aids and dental. Dental expenses can add up quickly, but dental insurance plans are often include high deductibles and are capped at $2,000 to $3,000 a year. Vision insurance can also be purchased, but you have to account for co-pays.

Don't Set it And Forget It

The best way to manage your health care costs in retirement is to make sure you are adequately insured and to stay well-informed on your options each year. It is important to review plan elections to ensure you are getting the most economical coverage for your changing medical needs. For example, as you age, you are more likely to use your deductibles so a high deductible plan with lower premiums may not be economical. Coverages, providers, premiums and other plan elements can change from year-to-year. You may also need to see different doctors or specialist due to a new diagnosis. By proactively managing both your health and your health care coverage, you can shave thousands of dollars off your health care costs, which can greatly enhance your financial security in retirement.