Retiree medical costs are soaring

If you’re a retiree dealing withMedicare, you’ve just noticed that your increased (5.9%) Social Security benefit is being reduced substantially by rising costs for MedicarePartBandPartD(your drug plan), aswell as by increased costs for drugs thatmay be only partially covered by insurance. Additionally, mostMedicare supplement policies raised their monthly premiums for 2022.

Andthis is just the start, according to anewreport by the Employee BenefitResearch Institute (EBRI). Medicare covers only about two-thirds of health care costs for the average retiree. Those additional expenses cut deeply into retirees’ savings in retirement.

Given this trend, if you’re planning for retirement in coming years, you’ll need to save a lot more, according toEBRI. How muchmore?

Thenewreport says that a 65-year-old couple with significant drug expenses in retirement, along with other standard health care expenses, needs to have accumulated $361,000 in 2021 by age 65 to be reasonably certain their medical costs in retirement will be covered. That huge number compares with $325,000 in 2020 — a 10% year-over-year increase. (Details of this report can be found atEBRI.org.)

That growing savings need reflects the true impact of inflation on retiree health care costs. It’s caused by the rising costs of newtreatments and the growing numbers of baby boomers qualifying forMedicare.

At age 65, a retirement period could stretch 25 years. Andat only3% inflation, today’s nominal costs could be expected to double.

Let’s take another example fromthe EBRI report. In order to have a90% chance of being able to cover justMedicare premiumsand supplement costs, a 65-year-old mantoday needs $142,000 in savings and a 65-year-oldwomanneeds $159,000.

For mostmiddle-income people trying to plan for retirement living costs, this is a staggeringsumto set aside for retirement medical expenses. Especially sowhenyou realize howmuchMedicare doesn’t cover, such as dental, hearing and vision services.

Andthis savings figure does not include provisions for long-term custodial care expenses, not covered byMedicare unless after a hospitalization.

Many people are rushing toMedicare Advantage plans, which combine almost allMedicare services into one very low monthly fee. Many of these plans include prescription drug coverage— up to a point.

Andthat’s the key element of these "managed care" plans. They keep costs low by negotiating services with physician and hospitals.

But these plans restrict care to in-network providers, whichmay not be your optimum health care choice. They charge substantial extra fees for going out of network, andmay not grant permission.

Andprescription drugsmay be limited to generics andmay not cover cutting-edge therapies.

Evenworse, theremay be substantial copayments required inside the advantage plan after a certain level of resources is used. That possibility offsets their risk in offering such lowmonthly payments for coverage. Working longer— if you have good health coverage atwork (andwork for a company with more than 20 employees)— allows you to delay signing up for PartBand a supplement until you actually retire. Having these health costs paid by your employer substantially reduces the amount you need to save.

Yet with somany people in company plans with high deductibles, itmay be less expensive to useMedicare and buy supplemental insurance to fill the gap.

That’swhy health savings accounts are so useful if started early. They can be used either to pay annual out-of-pocket expenses or to pay retireeMedicare supplement premiums.

So, next time you review your financial plans for retirement, don’t just consider housing, food, entertainment and travel.

Based on the odds, the olderwe get the more healthcare will need. Andit’s getting more expensive every year. That’s the SavageTruth.

Terry Savage is a registered investment adviser and the author of four best-selling books, including "The Savage Truth on Money." Terry responds to questions on her blog at TerrySavage.com.

Terry Savage

The Savage Truth