The biggest financial worry of retirement happens to be among the most manageable and easiest to conquer.
Surveys routinely show that Ameri-cans are most concerned about retirement medical expenses. Even high net worth individuals say they’re worried post-career medical care will deplete their assets.
It’s no wonder. Every year we’re faced with fresh estimates of total out-of-pocket retirement medical costs and the media hype the estimates. The Employee Benefit Research Institute (EBRI) estimates a couple aged 65 in 2019 will need about $301,000 to have a 90% probability of covering their out-of-pocket retirement medical expenses, excluding long-term care.
The latest estimate from Fidelity Investments for the same couple is $285,000. Those numbers can seem overwhelming. But when we learn how they’re compiled and the resources available to retirees to manage them, out-of-pocket expenses are likely to fall much lower on your list of financial worries.
With Medicare Annual Enrollment Period approaching (Oct. 15 – Dec. 7), this is the time to take a hard look at retirement medical expenses and be sure the right plan for you is in place. If you’re new to Medicare or looking forward to retirement in a few years, go through the same process when it’s time for you to enroll in Medicare. Let’s first break down those big numbers of lifetime spending estimates.
The lifetime estimates are for expenses over 20 to 30 years, depending on the estimate. An estimate of $300,000 over 20 years is $15,000 annually. That’s for two people, or $7,500 each. The estimates also are adjusted for inflation, so they aren’t in 2019 dollars.
If you make the same estimate with your cable television bill, you’ll probably estimate you’ll pay about $100,000 for cable over the next 20 years. It looks much more daunting when presented that way. Like your cable bill and other expenses, the medical expenses will be paid gradually over the years. You’ll pay them using Social Security benefits (which are indexed for inflation), investment income and gains, and the principal in your nest egg.
To be sure, medical expenses will be one of your most significant retirement expenses. They’re also likely to increase over time. Most importantly, there can be a great deal of uncertainty about the level of retirement medical expenses. The estimates are of median or average spending for retirees.
There’s a wide variation in individual spending. The EBRI estimates the range of spending among retirees and those in the highest 10% of spending, pay quite a lot.
Fortunately, you can reduce the uncertainty significantly and also reduce your out-of-pocket medical expense spending. The upcoming Medicare Open Season is the latest opportunity to do that. Most people think their retirement medical expenses depend on their health, and their future health is unpredictable. But other factors are more important in determining your out-of-pocket spending. We need to understand some details of Medicare and the way the estimates of lifetime spending are compiled.
Traditional Medicare has a lot of coverage gaps. Most vision, dental and prescription drug costs aren’t covered. Neither are hearing aids. Over-the-counter medicines also generally aren’t covered.
Most importantly, there’s 20% co-insurance for most covered care. A beneficiary in traditional Medicare is on the hook for 20% of most covered medical care, no matter how high the bill. A major surgery or illness or a chronic condition can trigger thousands, or tens of thousands, of dollars in out-of-pock-et costs rapidly.
But you don’t have to be at risk for all those costs.
When you are in original Medicare, you need additional coverage.
Buy a comprehensive Medicare supplement, or Medigap, policy. There are 10 different types of policies available. Each type covers a different amount of Medicare’s gaps. The more gaps that are covered, the higher the policy’s premium. We’ll discuss this in more detail next month.
When you’re first eligible for Medicare, insurers must issue you a policy without regard to your health.
I recommend that original Medicare beneficiaries purchase the broadest Medicare supplement policy they can afford. The broadest type of policy now is known as Plan F, but it will be eliminated beginning in 2020. The next broadest coverage is Plan G, which will remain available.
Prescription drugs are the other major gap in Medicare. They also aren’t covered by Medicare supplement policies. But you can buy separate coverage through a Part D Prescription Drug policy. We’ll also discuss these policies in more detail next month.
With these two policies plus original Medicare, the only major medical expenses that won’t be covered are vision and dental care and hearing aids. You’ll generally have to plan on paying these expenses out of income and savings, though you might find vision and dental insurance or discount plans in your area that are attractive to you.
When you’re in original Medicare, you should plan to maximize insurance premiums in order to minimize uncertainty and out-of-pocket costs.
A recent study by T. Rowe Price found that about 75% of out-of-pocket medical costs for most retirees were insurance premiums, including Medicare premiums. About 25% of retirees paid less than $2,000 annually in premiums. Other out-of-pocket spending varied considerably, and a major cause of the variation is the amount of insurance coverage.
A married couple in original Medicare can obtain broad coverage in most areas of the country for less than $3,000 each. That includes monthly Medicare premiums. There’s an alternative to this package of traditional Medicare, plus addition-al insurance coverage. You can join a Medicare Advantage plan. These plans, which now cover about one-third of Medicare enrollees, have all the original Medicare coverage.
They also provide additional benefits for prescription drugs, vision and dental care. They might include additional coverage. The Advantage plans also have a cap on your annual out-of-pocket expenditures for covered care. Most areas of the country have several Advantage plans available. They’re not all the same, so compare details. Focus on the providers that are in the network. If you take prescriptions drugs, check the coverage for those drugs.
In the next article, I discuss the important differences between original Medicare and Medicare Advantage. With either of these approaches, uncertainty about your lifetime medical expenses is greatly reduced. You can take an ax to retirement medical expenses.
You should be able to pay premiums and many of the co-payments and deductibles from monthly income. Other out-of-pocket expenses might be paid from savings or by reducing other expenses.