(The opinions expressed here are those of the author, a columnist for Reuters.)
By Mark Miller
CHICAGO, May 13 (Reuters) – How much will healthcare cost you in retirement? Your mileage will vary – but this much is clear: the forecast is getting more intimidating.
A new report from Fidelity Investments estimates that the cost of healthcare throughout retirement for a 65-year-old opposite-gender couple retiring this year is $300,000, some 30% higher than it was a decade ago. The report relies on longevity projections by the Society of Actuaries, which currently forecasts that men will live to 87, and women to age 89.
A dollar figure like this can freeze you in your tracks. It is so large you might prefer not to even think about it. “It can create an ostrich-in-the-sand response,” said Hope Manion, senior vice president, Fidelity Workplace Consulting, adding it could prompt people to think, “I’ll never be able to save that much, so I won’t even try.”
But retirees do not need all that money at the start of retirement, because in fact they will spend it across a retirement of 20 or more years. And to a great extent, these expenses can be managed very well, as they are predictable, and a good chunk will be covered by Medicare.
Eighty percent of the dollars in Fidelity’s forecast will be spent on Medicare Part B and D premiums and the program’s cost-sharing provisions, including co-payments, coinsurance and deductibles. These expenses can be funded with savings, or income from Social Security or pensions. The Part B premium is deducted from Social Security benefits in most cases.
Your Medicare enrollment choices will determine the balance between premiums and other out-of-pocket spending. The big decision when you enroll is between Original Medicare and Medicare Advantage, the commercially offered managed care alternative to Original Medicare.
Everyone pays the Part B premium ($148.50 this year). Original Medicare beneficiaries without supplemental coverage are subject to a deductible of $1,484 for inpatient hospitalization plus daily copayments for extended hospital and skilled nursing facility stays. There is also a separate deductible of $203 plus 20% coinsurance for most physician and other outpatient services, including for drugs administered by physicians for cancer and other serious medical conditions.
Most Original Medicare enrollees typically have some form of out-of-pocket cost protection – either a Medigap plan, coverage from a former employer or union or Medicaid. But a recent Kaiser Family Foundation report https://bit.ly/3tDzFtB found that 10% of Original Medicare enrollees have no supplemental coverage, which is a worrisome finding (https://bit.ly/3tDzFtB).
Medicare Advantage enrollees pay less upfront in premiums. Many plans come with prescription drug coverage wrapped in at no extra cost aside from the Part B premium, and all come with a built-in out-of-pocket cap – so Medigap plans are not used alongside them.
But costs can jump if you become ill and use a lot of healthcare services in any given year. In 2020, the average Advantage plan cap https://bit.ly/3eDTfBw was $4,925 for in-network services, according to Kaiser, while the cap for out-of-network services is much higher, at $8,828 (https://bit.ly/3eDTfBw). In Original Medicare, the average out-of-pocket spending among traditional Medicare beneficiaries in 2018 was $6,150, according to unpublished Kaiser data. That figure includes premiums and out-of-pocket outlays for uncovered services (such as dental care).
And enrollees in Original Medicare have far greater choice – they can visit any healthcare provider that participates in the program, and most do. Advantage enrollees face the usual managed-care restrictions and hassles with prior authorization requirements and denials of care.
WILD CARDS: EARLY RETIREMENT, LONGEVITY
Medicare choices aside, a couple of other variables will affect your lifetime cost. Right now, early retirement due to COVID-19 is a major factor. Recent research https://crr.bc.edu/wp-content/uploads/2021/03/IB_21-7.pdf from the Center for Retirement Research at Boston College (https://bit.ly/3o8iGOC) points to a surge of retirement over the past year among workers aged 62 and older, especially among lower-income households – and shows that the size of the early-retirement wave is slightly larger than the one following the Great Recession of 2009.
These early retirees will lose the benefit of employer-sponsored health insurance before they qualify for Medicare, boosting their lifetime healthcare costs.
The other big variable is your longevity – and not in the way you might think. Women tend to live longer, so they actually tend to incur higher lifetime healthcare costs than people who die younger. This is reflected in the Fidelity data – among single retirees, the 2021 health cost estimate is $157,000 for women and $143,000 for men.
But the big takeaway from these lifetime spending forecasts is that healthcare will be one of the basics you must plan to cover in retirement.
Health Savings Accounts (HSAs) offer a way to build a saving reserve for these costs. These tax-advantaged accounts are available to people enrolled in high-deductible health insurance plans, and they can be used to meet current deductible and other out-of-pocket healthcare costs (Details on how these plans work can be found here https://bit.ly/3o5iLTe (https://bit.ly/3o5iLTe).
Most employers offset the high deductible with an annual cash contribution to the account. At Fidelity, for example, 78% percent of HSA employer clients make contributions to employee accounts, averaging $935 per year.
But if you have the means to meet some or all of these expenses from other resources, the HSA can be a vehicle for socking away money for healthcare in retirement.
“You just want to make sure that something is earmarked in the financial plan for it,” said Fidelity’s Manion. (Writing by Mark Miller Editing by Matthew Lewis)