New estimates for health care retirement costs may be too low

Most Americans underestimate their health care costs in retirement, and that’s a problem because those future bills could turn out to be significantly higher than you expect.

A 65-year-old man enrolled in Medicare with a Medigap plan must stash away $166,000 in medical expenses to have a good (90%) chance of covering his expected health care costs in retirement, according to new research from the Employee Benefit Research Institute (EBRI), a non-profit, nonpartisan organization. Due to longer life expectancy, a 65-year-old woman needs $197,000.

And those may be lowball estimates, experts say, underscoring the need for employees to focus on ways to lower that overall cost or use every resource to save enough.

“Medicare doesn’t cover all healthcare costs,” Paul Fronstin, director of health benefits research at EBRI, told Yahoo Finance. As a result, many Medicare beneficiaries purchase Medigap or enroll in Medicare Advantage plans to help offset the out-of-pocket costs of health care. They also enroll in Part D prescription drugs. The combination of premiums for additional coverage and out-of-pocket expenses can put a huge strain on Medicare beneficiaries’ finances.


For seniors enrolled in Medicare Advantage plans, savings goals tend to be lower, according to the report. A 65-year-old man enrolled in Medicare Advantage, who has median drug spending and average use of health care services, will need to save $96,000 to have a 9 in 10 chance of paying medical bills if he has retires. Meanwhile, a 65-year-old woman needs $113,000.

The EBRI report also takes into account a provision of the Inflation Reduction Act that caps annual out-of-pocket Medicare Part D drug spending beginning in 2025 so that no enrollee pays more than $2,000 a year out of pocket.

That limit will affect 50 million Americans with Medicare Part D, and could protect enrollees from skyrocketing costs. This provision directly benefits the 1.4 million Medicare patients who spend more than $2,000 each year on medications, including those who need expensive cancer drugs, according to an analysis by the Kaiser Family Foundation (KFF), a non-profit organization. profit organization.

‘Wild conservative’

Importantly, this EBRI analysis does not weigh up the potential costs of long-term care expenses and other bills not covered by Medicare, such as dental care and eye care. These are often overlooked when planning your retirement.

The EBRI analysis does not take into account the potential costs of long-term care expenses and other bills not covered by Medicare, such as dental care and eye care.  (Getty Creative)

The EBRI analysis does not take into account the potential costs of long-term care expenses and other bills not covered by Medicare, such as dental care and eye care. (Getty Creative)

“Planning health care costs is one of the hardest jobs,” Mary Johnson, policy analyst for The Senior Citizens League, told Yahoo Finance. “Retirees not only need to save enough to replace about 70% of their pre-retirement earnings — just to live on — but we also need to plan carefully for much larger amounts as we get older and need care beyond health care. paying assistants to help with daily living, cooking, cleaning or housekeeping.”

“We’re not wired to think this way,” Johnson said.

It also doesn’t account for the fact that many people retire before they become eligible for Medicare at age 65 and usually pay the cost of their health insurance out of pocket for a few retirement years. In EBRI’s 2022 Retirement Confidence Survey of 2,677 adults, including 1,132 retirees, more than one in four (29%) expected to retire at 70 or higher or not at all, but 62 was the median reported retirement age.

“These EBRI projections are wildly conservative,” Melinda Caughill, co-founder of the Medicare advisory website 65 Incorporated, told Yahoo Finance. “Unfortunately, this is just the tip of the iceberg. We are going crazy in this country because people expect health care after retirement to be free and should be free. But it isn’t, and it won’t be. I wish there was a healthcare money tree, but there isn’t.”

‘Don’t move for sun or palm trees’

These findings, conservative or not, should serve as a warning to Americans who have years left in retirement to consider contributing to a health savings account (HSA).

For 2023, the annual inflation-adjusted limit on HSA coverage-only contributions under a high-deductible health plan will be $3,850, up from $3,650 in 2022. The HSA contribution limit for family coverage will be $7,750, up from $ 7,300.

Your HSA contribution to your employer can be made through an automatic payroll deduction where the money is routed tax-free from your paycheck to an HSA. You can also add funds directly to your HSA at any time. While these contributions are not tax-free, they are deductible on your tax return. Some employers match contributions to HSAs similar to employer-provided retirement savings accounts. You can also open an account as a self-employed freelancer or entrepreneur.

“From a tax point of view, an HSA is the best there is,” Fronstin previously told Yahoo Finance. “It benefits from a triple tax advantage. It is the only account into which someone can deposit money tax-free, accrue it tax-free, and release it tax-free for qualifying healthcare expenses.”

Another way to reduce your future health care costs is to work longer. If workers who receive health benefits — and a salary — from their employer choose to work past age 65 and defer enrollment in Medicare Parts B and D, they will have to have stashed away less than the savings estimates, according to the report. the EBRI researchers.

Happy mature executive assisting her younger colleague working on a computer in the office.
The number of people over 65 still in work is increasing and is expected to rise further from an employment rate of 18.9% in 2021 to 21.5% in 2031, according to the (Getty Creative)

However, the number of people over 65 who are still employed has increased and is expected to rise further from a participation rate of 18.9% in 2021 to 21.5% in 2031, according to the Bureau of Labor Statistics.

Finally, here’s another hefty cost savings for retirees looking to relocate for their next chapter. Health care costs “vary incredibly depending on where you live,” Caughill said.

According to the Missouri Economic Research and Information Center’s Cost of Living Data series, health care costs in Maryland, for example, were lower than Florida or Arizona by 2022.

“What’s $100,000 in Arkansas could be $200,000 in Illinois or Wisconsin,” Caughill said. “Retirees should not move for the sun or palm trees, but for the cost of health care.”

Kerry is a Senior Reporter and Columnist at Yahoo Finance. Follow her on Twitter @kerryhannon.

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