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Retirement Medical Expenses Drop, but You’ll Pay Plenty Without the Right Plan

Published on: Jul 28 2020

There is a bit of good news for those who are worried that retirement medical expenses will eat away their nest eggs, but you still need to plan carefully to minimize your out-of-pocket medical spending.Each year, the Employer Benefits Research Institute (EBRI) estimates the total out-of-pocket medical expenses that hypothetical 65-year-olds are likely to spend during the next 20 years.

In the latest study, the estimated lifetime medical spending is 8% to 10% lower than the 2019 estimates. These are among the biggest one-year declines since the study began.The main cause of the decline is lower estimated spending for prescription drugs and Part D Prescription Drug policy premiums. The Trustees for Medicare, in their annual report, projected lower spending for prescription drugs in the coming years by Medicare beneficiaries, and that reduced estimates in the study for both Part D policy premiums and out-of-pocket spending.Despite the decline, the out-of-pocket medical costs for retirees still are likely to be substantial.Medicare doesn’t cover all retiree medical expenses.

There are the monthly Medicare Part B premiums. There are out-of-pocket costs for the care Medicare doesn’t cover, as well as deductibles and copayments for covered care. Most beneficiaries will pay for Medicare supplement insurance (Medigap) and Part D Prescription Drug policies to cover many of the gaps in Medicare’s coverage.

In the latest EBRI study, to have a 50% probability of covering lifetime medical costs, a married couple with each partner at least 65 years old in 2020 will need $168,000 of savings to pay for medical expenses. For a 90% probability of covering medical expenses, a couple consisting of partners at least 65 years old today would need $270,000 in savings just for the medical expenses.

Those estimates are for people with median prescription drug expenses.When the couple has prescription drug expenses greater than 90% of retirees, the estimates jump to $325,000 in savings to have a 90% probability of covering their expenses. This is important and timely information, since Medicare open enrollment will be coming around in a few months.

Medicare beneficiaries need to learn the substantial gaps in Medicare. In general, Medicare pays only about 66% of the cost of the medical services of its beneficiaries. The study also doesn’t include long-term care expenses or services excluded from Medicare, such as dental, vision and hearing aids.

Since the Medicare trust fund is not in great shape, retirees and pre-retirees should anticipate changes in the pro-gram that will increase the share paid by beneficiaries.

In general, beneficiaries have two strategies for reducing their out-of-pocket retirement medical expenses.One strategy is to enroll in a Medi-care Advantage plan. These plans cover most of the expenses that aren’t covered by original Medicare, often including vision, dental and hearing services.

The annual out-of-pocket costs are limited to around $6,500, not counting Medicare Part B premiums and sometimes small monthly premiums charged by the plan.The other strategy is to supplement Medicare Parts A and B with additional insurance. A Part D policy to cover prescription drug expenses is essential, since original Medicare covers few prescription drug expenses.

A Medicare supplemental policy will cover many of the other gaps in Medicare. There are 10 types of supplemental policies to choose from. What’s known as a Plan G policy provides the most comprehensive coverage available.Both types of policies are issued by private insurers. We’ll discuss these issues in more detail as open enrollment approaches.

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