Don't Be Surprised by Retiree Healthcare Costs

Retirement isn't cheap. Even though you're no longer drawing a paycheck, you still must pay for housing, food, utilities, transportation and healthcare, to name just a few expenses. As prices continue to escalate, it's not surprising that the ages at which people expect to retire -- and when they actually do -- have crept up in recent years.

Many factors are at play:
  • People are still recovering from the haircut they took during the Great Recession, which decimated home values and retirement account balances.
  • The number of companies offering traditional pensions continues to drop, meaning more retirees will need to depend on personal savings and Social Security for retirement income.
  • Similarly, fewer companies offer subsidized health insurance to retirees, leaving those under 65 who don't yet qualify for Medicare to fend for themselves.

Speaking of healthcare costs, here's a number that'll stop you in your tracks: According to an annual Fidelity Investments study of retirement costs, the average couple retiring in 2014 at age 65 is expected to need $220,000 (in today's dollars) to cover their medical expenses in retirement. Those planning to retire at 62 can expect another $17,000 in annual additional expenses, the study says.

Fidelity's estimate includes Medicare premiums, deductibles, copayments and other out-of-pocket costs, but notably does not include most dental or vision services, over-the-counter medications or, most importantly, long-term care. In fact, according to the U.S. Census Bureau's 65+ in the United States report, the average annual cost of a private room in a nursing home is $83,585; semi-private isn't much better at $74,825.

One last worrying statistic: When Fidelity polled pre-retirees aged 55 to 64, 48 percent believed they'd only need $50,000 to cover their healthcare costs in retirement. That's quite a reality gap.

If you're planning to retire in the next few years and are concerned you haven't saved enough money to cover your healthcare expenses, here's a sampling of what you can expect to pay:

Medicare Part A helps cover inpatient hospital, skilled nursing facility and hospice services, as well as home health care. Most people pay no monthly premium for Part A. However, in 2014 there's a $1,216 deductible for each time you're admitted as an inpatient, plus a $306 daily coinsurance after 60 days ($608/day after 90 days).

Medicare Part B pays toward medically necessary doctor's services, outpatient care, durable medical equipment and many preventive services. It's optional and has a $104.90 monthly premium (although higher-income people pay more). There's a $147 yearly deductible, after which you're responsible for 20 percent of Medicare-approved service amounts, provided the doctor/provider accepts Medicare. Note: There's no annual limit for out-of-pocket expenses.

Medicare Part C (Advantage) plans are offered by private insurers as alternatives to Parts A and B. They're usually structured like HMO or PPO plans. Most cover prescription drugs (so Part D is unnecessary) and some also provide dental and vision coverage. You must use the plan's doctor, hospital and pharmacy provider networks, which are more restrictive than under Parts A and B.

Unlike traditional Medicare, Advantage plans do have annual out-of-pocket maximums, which differ by plan. Other cost variables include monthly premiums, copayments and covered medications. Some Advantage plans cost no more than Part B, while others have a higher premium (to account for drug and other additional coverage). Use this Medicare Plan Finder to compare plans in your area. Also, this Kaiser Foundation study provides an in-depth discussion on Advantage plan costs, features and limitations.

Medicare Part D helps cover the cost of prescription drugs. It's optional and carries a monthly premium. These privately run plans vary widely in terms of cost, copayments and deductibles and medications covered. The 2014 national average monthly premium is about $32, although plans can cost up to $175 a month. Plus, higher-income people pay an additional surcharge.'s search engine lets you compare Part D plans available in your area. Each plan has a "formulary," which is a list of drugs covered at varying copayment amounts. Formularies vary widely and can change from year to year, so compare plans annually. You may not find a plan that covers all your medications, but aim for one that at least covers the most expensive drugs. Also, note that they may cover generic versions, when available.

Medigap Insurance. Some people purchase additional Medigap (Medicare Supplemental) insurance. It's offered by private insurers and helps pay for many items not covered by Medicare, including deductibles, copayments, coinsurance -- and sometimes coverage when traveling abroad. There are 12 standard plans offered and they vary widely in terms of cost, covered benefits and participating states, so compare your options carefully. To learn more, visit this site.

To learn more about how Medicare works and what it does and doesn't cover, read Medicare & You 2014. AARP also provides a great Medicare Starter Kit that answers many common questions.

Bottom line: Even though Medicare does pay a significant portion of retiree medical care, make sure that when you're budgeting for retirement you take into account the many out-of-pocket expenses you're likely to encounter.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

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