Most Americans underestimate their health care costs in retirement, and that’s a problem because those future bills could turn out to be significantly higher than expected.
A 65-year-old man enrolled in Medicare with a Medigap plan will need to set aside $166,000 for medical expenses to have a good chance (90%) of covering his projected healthcare costs in retirement, according to a news report. study by the Employee Benefit Research Institute (EBRI), a non-profit, non-partisan organization. Due to longer lifespans, a 65-year-old woman will need $197,000.
And these may be low estimates, experts say, underscoring the need for workers to either focus on ways to cut those overall costs or use all the tools to save 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 out-of-pocket healthcare costs. They also enroll in Part D drug plans. The combination of premiums for supplemental coverage and out-of-pocket costs can strain the finances of Medicare beneficiaries.
For seniors enrolled in Medicare Advantage plans, savings goals are generally lower, according to the report. A 65-year-old man enrolled in Medicare Advantage who has median drug spending and average health service utilization will need to save $96,000 to have a 9 in 10 chance of paying his 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 Inflation Reduction Act that caps annual Medicare Part D prescription drug spending beginning in 2025, so no enrollee will pay more. of $2,000 per year.
This limit will affect 50 million Americans with Medicare Part D and could protect enrollees from soaring 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 expensive cancer drugs, according to an analysis by the Kaiser Family Foundation (KFF). , a non-profit organization.
It’s 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, policy analyst for the Senior Citizens League, told Yahoo Finance. “Not only do retirees need to save enough to replace around 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 in addition to health care. , such as paying for help with activities of daily living, cooking, cleaning or maintaining a home.
“We’re not wired to think that way,” Johnson said.
It also ignores the fact that many people retire before they are eligible for Medicare at age 65 and typically pay out-of-pocket health 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 four (29%) expected to retire at age 70 or older or not at all, but 62 was the reported median retirement age.
“These EBRI projections are extremely conservative,” Melinda Caughill, co-founder of Medicare advisory website 65 Incorporated, told Yahoo Finance. “Unfortunately, this is just the tip of the iceberg. We are freaking out in this country because people expect health care in retirement to be free and should be. But it isn’t, and it won’t be. I wish there was a money tree for health care, but there isn’t.
“Don’t move for the sun or the palm trees”
These results, conservative or not, should be a wake-up call to Americans who still have years before retirement to consider contributing to a health savings account (HSA). To be eligible, however, you must be enrolled in a high-deductible healthcare plan.
For 2023, the inflation-adjusted annual limit on HSA contributions for personal coverage under a high-deductible healthcare plan will be $3,850, up from $3,650 in 2022. HSA premium for family coverage will be $7,750, down from $7,300.
Your HSA contribution to your employer can be made through an automatic payroll deduction where funds are directed from your paycheck, tax-free, to an HSA. You can also add funds directly to your HSA at any time. Although these contributions are not tax exempt, they are deductible on your income tax return. Some employers combine contributions to similar HSAs with employer-provided retirement savings accounts. You can also open an account as a freelancer or business owner.
“From a tax standpoint, an HSA is the best thing there is,” Fronstin previously told Yahoo Finance. “It benefits from a triple tax advantage. It’s the only account that allows someone to deposit money tax-free, accumulate it tax-free, and withdraw it tax-free for eligible healthcare expenses. .
Another way to reduce your future health care needs is to work longer. If workers receiving health benefits — and a paycheck — from their employers choose to work past age 65 and defer enrollment in Medicare Parts B and D, they will need to have saved less than the researchers’ savings estimates. of the EBRI, according to the report.
However, the number of people 65 and older in the workforce has increased and is expected 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 big cost cutter for retirees considering moving for their next chapter. Health care costs “vary wildly depending on where you live,” Caughill said.
In 2022, according to the Missouri Economic Research and Information Center cost of living data series, health care costs in Maryland, for example, were lower than those in Florida or Arizona.
“What’s $100,000 in Arkansas may be $200,000 in Illinois or Wisconsin,” Caughill said. “Pensioners should not move for the sun or the palm trees, but for the health costs.”
Kerry is a senior reporter and columnist at Yahoo Finance. Follow her on Twitter @kerryhannon.
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