Here’s why Medicare isn’t the answer
For the average American, healthcare in retirement will cost more than they have in their entire savings account.
And unfortunately, Medicare doesn’t help.
Healthcare is, of course, the single biggest item most retirees need to prepare for. Lately, a study published by the EBRI (Employee Benefit Research Institute) emphasized the importance of this. The institute’s data shows that despite the coverage offered by Medicare, retirees should expect to pay significant out-of-pocket expenses for their healthcare in retirement. These costs cover a range of expenses, including insurance premiums, program deductibles, and prescription drug treatments.
For help planning your retirement, including paying for health care, consider Working with a financial advisor.
Healthcare cost details
Just like health care costs for retirees can go ranges. One of the biggest challenges in determining retirement savings is the unreliability of the data. A researcher’s findings change based on mortality assumptions, local cost of living, updated government programs, market returns, and more. EBRI’s study attempts to correct this by running a model that assumes the latest version of Medicare and a large population with varied lifespans based on standard demographics.
In this regard, EBRI found that even with supplemental insurance (commonly known as “Medigap” insurance), men need an average of $166,000 in earmarked savings to meet their retirement health needs. For women with longer expected life expectancies, this number increases to US$197,000 and to an average of US$318,000 for two-person households.
Those are big numbers in and of themselves. But what makes EBRI’s results even clearer is how they compare to people’s overall savings.
The median Household of retirement age (age 65 or older) has total savings of $87,725. This is supplemented by income from social security, which varies and pays more to higher-income households. However, regardless of the extra income, most financial experts believe that this is far too little to cover the costs of the average household in retirement.
It’s also less than half of what someone needs for their healthcare expenses alone.
The Role of Medicare
Much of the reason for this has to do with the Medicare Program.
Medicare has a reputation for simplicity. Many, if not most, Americans believe this is a simple universal health care program for retirees. However, the reality is that this program does not and never has provided comprehensive health insurance. Instead, it’s always been a patchwork of options centered on paying for hospital stays and the occasional doctor’s visit. Although the government has updated some parts of this program over time, such as For example, add a partial payment for prescription drugs Medicare Dindividual retirees have always been expected to fill the gap.
Most households cover this through a combination of supplemental insurance, Medicaid (which, remember, is a different program) and (albeit unusually) employer health insurance plans. Combined, this makes for a potentially expensive network of rewards and out-of-pocket expenses.
Arguably the biggest cost factor is which version of Medicare someone signs up for. The program has two versionsknown as traditional and Advantage. Traditional Medicare includes hospital stays, doctor visits, and some drug costs (Parts A, B, and D, respectively). It covers fewer services and involves more expenses, but is also accepted by virtually all providers.
Medicare benefit includes coverage that Traditional Medicare does not provide, such as B. More prescription drugs and dental coverage. It has fewer out-of-pocket costs than Traditional Medicare and more total spending caps. However, the program is also operated by private insurers, resulting in lower payments and higher overhead, making Advantage widely accepted by far fewer providers.
For retirees who can handle the limited choices, EBRI found that Medicare Advantage makes a big difference in overall spending. Men enrolled in this program only need about $96,000 to meet their retirement spending needs, while women need an average of $113,000. While that’s still more than most people by age 65 have in total wealth, it’s significantly less than the money spent by those enrolled in Traditional Medicare.
The big problem
However, no version of Medicare provides comprehensive health care. From drug costs to long-term care, the program has hard limits. For this reason, as a study by the Kaiser Foundation shows found, around 90% of all retirees have some form of supplemental health plans. Low-income retirees may qualify for Medicaid, while many other retirees choose supplemental liability insurance called Medigap. These are health insurance programs that cover expenses that Medicare typically omits, and they typically have premiums ranging from about $130 to $300 per month.
Whatever you choose, all retirement health programs come with additional costs. Even Medicare itself requires deductibles, co-payments, and premiums that surprise many retirees who expect completely free health insurance. Supplemental insurance requires out-of-pocket expenses, most Medicaid programs require some form of patient contribution, and often a retiree needs treatment that no program covers.
It adds up, and the EBRI expects these costs to continue to rise. As healthcare becomes more expensive, life expectancies lengthen, and both employers and the government consider cuts to traditional benefit programs, many households must prepare for health insurance to drain more of their retirement account than ever before.
The final result
A new study from the Employee Benefit Research Institute has some hard numbers on what it will cost to pay for your health care in retirement, a cost that’s more than the average retirement account overall.
Medical expenses are, to a large extent, non-negotiable expenses in retirement. This is how every good old-age provision should calculate exactly how much you have left after paying the doctor.
A financial advisor helps you plan your own retirement provision. Finding a financial advisor doesn’t have to be difficult. Smart Assets free tool matches you with up to three verified financial advisors operating in your area, and you can interview your advisor matches for free to decide which one is right for you. When you are ready to find an advisor who can help you achieve your financial goals, get started now.
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