How Much Should You Budget For Healthcare In Retirement?
It’s stupid expensive, but maybe less than you thought. Here’s a forecast of your cost, and a better way to approach it.
I paid $2 for a $106 prescription last week. Insurance covered the rest. Pretty good deal, huh?
No, it’s not. It sucks.
“You’ve got a nice healthy body there. Sure would be a shame if something happened to it.” –Mafia Health Insurance Co.
My wife’s employer deducts $8,500 from her paycheck each year to insure the two of us (I’m retired, she’s not). On top of that top, her employer pays $13,000 more to that same insurance company. That’s $21,500 a year for the two of us ($900 per person per month)! Ouch.
With all that dough, they can easily cover the $104 of my overpriced prescription that would have cost $5 in Mexico.
Oh, and let’s not forget the thousands of dollars more that we also pay in deductibles, copayments, Medicare, Medicaid, and other health programs supported by our wages and taxes.
Don’t kid yourself, insurance doesn’t pay shit — it all comes out of our pockets
It’s not insurance, it’s a protection racket!
The cost of medical care in the US is out of control
The United States spends an average of $11,945 per person on medical care each year. You and I don’t necessarily pay it all, but someone does. The money comes from employee and employer payroll taxes, private insurance and Medicare premiums, copays, deductibles, and of course, our checking accounts for all the rest that isn’t covered.
At almost twelve grand per person, the US spends far more on healthcare than any other wealthy country. Switzerland comes in a distant second, at $7,000 per person — just 58% of what we spend. [Check out this website for some fascinating health and medical statistics.]
Is the quality of care twice as good in the US as everywhere else? Of course not. Something is seriously broken.
Last year over 290,000 Americans traveled to other countries for cheaper medical care. Nineteen million bought medications from other countries at a fraction of our cost.
Brilliant minds are working hard to figure out why it costs so much and how to fix it so I won’t drill down that rabbit hole any further. Someday they’ll figure it out, but until then you and I need to plan for a lot of medical expenses in our retirement.
The longer you live, the more it costs
Living a long time may be expensive, but they say the alternative is worse.
At age 65, your life expectancy is 18 years for a man and 21 years for a woman. Half of us will live longer, half shorter. The length of time you live dramatically affects your total healthcare costs.
Seniors aged 65 and older account for 35% of all heathcare expenditures, yet constitute only 17% of the population
Seniors are responsible for more than one third of all US healthcare costs — about $20,000 per person on average. Remember, this is the TOTAL COST. The portion you pay will be less.
- Men: 18 years at $20,000 = $360,000 total
- Women: 21 years at $20,000 = 420,000 total
- An average married couple = $780,000 total
Shocking? Hell yes, like touching a live wire!
What the “experts” say you’ll pay
Insurance pays some and we pay some, but as I pointed out above, it’s really “we” that pay it all one way or another.
Putting aside the fact that we’ve already paid hundreds of thousands of dollars more than we used, let’s focus on the future — our retirement — and what we’ll be paying then.
The pundits tell you to expect to pay out-of-pocket medical costs anywhere from $150,000 to $200,000 per person in retirement.
- Annuity.org says $400,000 per couple
- Fidelity says $315,000 per couple
- Kiplinger says $295,000 per couple
Those numbers divided over a lifespan of 20 years equals $1200 to $1700 a month — more than you’d pay for a matched set of new Cadillacs.
That seems way too high to me, but the insurance actuaries who do these calculations don’t show their work so I can’t reverse engineer their math. But all insurance companies, even Medicare, have big expensive buildings and lots of overhead. That means they’ll have a bias to charge more, just to be safe.
Medicare — a quick primer
Medicare is the universal health insurance for Americans and legal US residents age 65 and over (and some younger disabled individuals). Today it covers more than 64 million people, costs $917 billion annually, and accounts for over four percent of the US GDP.
There are four broad components of Medicare:
- Part A covers hospital stays, rehabilitation, convalescence, and hospice. It is the only mandatory component of Medicare and other than a few exceptions requires no premium payments, only deductibles and copayments. Funding is from payroll taxes on current workers and employers, not from payments you made in the past.
- Part B is optional (but important) and covers physician care, preventive services, tests, and equipment. It costs about $170 a month (in 2022), but some higher earners pay more. This part also requires deductibles and copayments.
- Part C is referred to as a “Medicare Advantage Plan” and effectively replaces parts A, B, and D while adding broader coverage such as vision and dental. It’s like a PPO or HMO when you were working and requires premiums and copayments that vary depending upon coverage options.
- Part D covers prescription drugs, costs at least $30 a month in premiums, and like the others, requires deductibles and copays.
You’ll also find a variety of supplemental plans (sometimes called “Medigap”) available on the open insurance marketplace that are added to your basic Medicare coverage to limit out-of-pocket costs and provide coverage for treatments that Medicare doesn’t cover very well.
You pay 100 percent for anything not covered by Medicare or supplemental insurance.
Forecasting your out-of-pocket costs in retirement
Since Medicare is the primary health insurance for 96 percent of seniors in the US, we’ll focus on those prices along with the common supplemental (Medigap) coverages available on the open market.
Lowest cost option:
Part A may is technically the only ‘required’ component of Medicare, but a tiny fraction of people choose that coverage alone. Parts A, B, and D should be taken together to provide baseline services for hospital, medical, and prescription drug coverage.
Still, only one in 10 seniors will select this combination because there is no upper limit to one’s out-of-pocket costs and a medical crisis could be financially devastating.
*Lowest costs for a single individual:
- Monthly Cost: $268 ($170 for part B, plus $48 for part D, plus an average of $50 out of pocket deductibles and copays)
- 20-Year Lifetime Cost: $65,000
- 30-Year Lifetime Cost: $97,000
*Assuming you’re healthy with average medical needs. A hospital visit for a few days can cost $2,000, and an extended stay can incur unlimited charges.
More common coverage
It is far more common (nine out of 10 seniors) to select Parts A, B, and D along with some type of supplement (Medicare Advantage or Medigap). This combination offers better coverage that includes prescriptions, office visits, vision, hearing, and dental — and caps the limit of your out-of-pocket copayments.
Medicare Advantage costs for a single individual:
- Monthly Cost: $293 ($170 for part B, plus $63 for Medicare Advantage, plus an average of $60 out of pocket deductibles and copays)
- 20-Year Lifetime Cost: $70,000
- 30-Year Lifetime Cost: $105,000
Medicare plus Medigap costs for a single individual:
- Monthly Cost: $366 ($170 for part B, plus $126 for Medigap, plus an average of $70 out of pocket deductibles and copays)
- 20-Year Lifetime Cost: $88,000
- 30-Year Lifetime Cost: $132,000
These plans vary in cost and benefits and premiums are higher as a result. The financial risk from a serious medical event is much lower.
A different way of looking at it
It appears the experts are using more expensive coverages and longer timeframes for their predictions (and padding it). That makes sense I suppose, but they present the information in a way that shocks and terrifies us.
“$400,000” is more shocking than “$366 per month”
Shocking claims attract readers and sells advertisements. The bigger the number the better. “$400,000 per couple” goes viral. “$366 a month” is just a night out on the town.
If I told you that “You need to budget 500 Grand!” for housing, would you be shocked? Maybe, but if you realize it’s the same $1,000 a month you were already expecting to pay, you wouldn't blink an eye.
It’s not a lump sum payment.
Budget a few hundred dollars a month in retirement for healthcare. 75 percent of it are premiums that you’ll write a check for, and the rest are your out-of-pocket expenses that will vary a bit, but average out in the long run.
Oh, and set aside a small fund in case of a serious health issue. Insurance is great but emergencies can hurt in more ways than one.
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
