Healthcare Costs in Retirement


Healthcare expenses can be a significant financial burden during retirement. Determining the amount of money needed to cover these costs involves both calculations and estimations. According to a recent report by the Employee Benefit Research Institute (EBRI), a couple may require anywhere between $189,000 to $351,000.

Medicare and Medigap

The numbers provided by EBRI reflect the necessary funds for a couple enrolled in Medicare and a Medigap supplement plan. To have a 90% chance of covering their medical expenses in retirement, the estimated amount needed is $351,000. On the other hand, a couple enrolled in Medicare Advantage, which is administered by private insurers, will need $189,000.

Back to Basics: Medicare

Many people do not fully understand the costs associated with Medicare until they are ready to enroll. The estimates provided by EBRI exclude long-term care expenses such as assisted living and home health aides, which are not covered by Medicare. It is crucial to be aware of these numbers in order to be adequately prepared for retirement.

The Cost Breakdown

One significant factor contributing to the disparity in costs is the steadily increasing price of Medigap supplemental coverage. However, other factors also come into play. The estimates include premiums for Medicare Parts B and D, including the Part B deductible and out-of-pocket spending for outpatient prescription drugs.

For most Medicare enrollees – regardless of whether they have traditional Medicare or Medicare Advantage – the standard Part B premium in 2024 is $174.70. However, high earners may have to pay more. The estimate for Medigap coverage includes premiums for Medigap Plan G, which is the most comprehensive option available to new members.

In the case of Medicare Advantage, the calculations assume a $0 premium for the plan. In 2023, approximately 73% of Medicare Advantage enrollees were in a plan with a $0 premium, according to KFF, a health policy organization.

Medicare Advantage: A Popular Choice

Medicare Advantage now covers over half of all Medicare enrollees, which amounts to more than 30 million Americans. Many individuals are drawn to these plans not only because of the $0 premiums offered by many providers but also due to additional benefits such as gym memberships and coverage for services that traditional Medicare does not include, like dental and vision care.

Comparing Medicare Options: Traditional Medicare and Medigap vs. Medicare Advantage

Traditional Medicare and Medigap

With traditional Medicare and Medigap Plan G, you can expect minimal out-of-pocket costs for doctor visits after paying the annual Part B deductible of $240 (2024 rate). Additionally, Plan G covers the Part A deductible for hospitalizations, which is set at $1,632 per benefit period in 2024. In the unfortunate event of a serious illness, your costs will be generally limited to the monthly premiums for Part B and Plan G.

The Cost Considerations of Medicare Advantage

Contrasting traditional Medicare, Medicare Advantage plans can result in considerably higher costs. For 2024, the maximum out-of-pocket amount for in-network care is $8,850, although plans may establish lower limits. Specialist visits may have copays of $50 or more, and additional fees can apply for services like MRIs.

It’s worth noting that seeking care outside of your plan’s network under Medicare Advantage can place the burden of full payment on you, except in emergency situations. Unlike traditional Medicare, which doesn’t employ provider networks, most doctors accept it.

Unpredictable Expenses vs. Predictable Expenses

Navigating healthcare budgeting under Medicare can be challenging, with a notable difference between unpredictable and predictable expenses under Medicare Advantage versus traditional Medicare supplemented by a Medigap plan. Under Medicare Advantage, your costs are likely to fluctuate according to your health status, making it difficult to plan your budget around these variables.

While initial costs may appear higher with Medicare plus Medigap, expenses are generally capped at your premium, even in catastrophic scenarios.

One certainty with Medigap is that costs tend to rise as you age. HealthView Services, a retirement healthcare data company, projects that a 65-year-old woman paying $1,571 annually for Plan G Medigap coverage would pay approximately $4,172 for the same coverage at age 85, representing a 166% increase. This increase is primarily driven by a combination of regular inflation adjustments and what’s known as “age rating.” In most states, Medigap plans charge higher premiums for older beneficiaries due to the expectation of increased medical service utilization.

While this increase may seem burdensome, it remains manageable within a budget. HealthView’s calculations indicate an average annual Medigap inflation rate of 7.85%, considering both regular inflation and age rating adjustments.

Weighing Costs and Considerations

At first glance, Medicare Advantage may seem more affordable, but it carries a higher level of uncertainty. On the other hand, traditional Medicare combined with Medigap offers a more predictable cost structure. Ultimately, the choice between the two depends on your personal preferences and risk tolerance.

For more information and personalized guidance, consult with a healthcare professional experienced in Medicare options.

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