Retirement Expenses: Health Care Costs
At the top of every newscast we hear news and commentary related to the passage of the new health care reform bill. Regardless of your opinion about the new legislation, this is a perfect time to think about your personal plan to pay for health care during retirement. Most people who plan for retirement don’t spend enough time thinking about health care expenses. People who do begin to consider retirement health care costs often don’t feel prepared to deal with them. According to the 2010 Retirement Confidence Survey, 51% of workers have little-to-no confidence that they have sufficient retirement savings to cover medical costs, and only 12% of workers are absolutely confident that their retirement fund will cover them medically.
Anyone who is planning for retirement – that should be everyone! – should know some basic information about how they will be covered in retirement. We’ve provided some basic information about Medicare (what many people will use in retirement for healthcare coverage), as well as a planning tool to help you estimate the cost of health care for your retirement years.
Medicare overview:
- Medicare consists of four major parts and one supplemental option[i]: This table outlines high-level information:
| Covers: | Funded by: | |
| Part A – Original Medicare | Hospital insurance | Social Security taxes |
| Part B – Original Medicare | Medical insurance | Participants’ monthly premium payments and subsidized by the government |
| Part C – Medicare Advantage | Parts A & B coverage
Generally offers extra medical and prescription drug coverage (extra fee) Variations of plans similar to working-individual insurance (HMO, PPO, PFFS, MSA and SNP) Availability varies by geographical area |
Participants’ premiums
Run by private insurance companies contracted and approved by Medicare Plans can charge different rates |
| Part D | Prescription drugs
May lower drug costs and protect agains higher costs in the future Primarily purchased by people using ‘Original Medicare’ (Parts A and B) |
Participants’ monthly premiums and supplemented by Medicare
Run by private insurance companies contracted and approved by Mediare |
| Medigap – Medicare Supplemental Insurance | Gaps in ‘Original Medicare’ coverage | People who choose to use Medicare Advantage (Part C) do not need (and are not allowed to purchase) Medigap insurance |
- Medicare does not cover the costs of long-term care, like assisted living and nursing home care, so the government recommends that individuals consider purchasing private long-term care insurance.
- ‘Original Medicare’ participants can minimize out-of-pocket costs by seeking Assignment medical providers – providers who have agreed to accept a Medicare-approved fee as full payment.
- There is a well-publicized gap in Part D coverage – known as the ‘doughnut hole’ – wherein a retiree could use all available initial prescription drug coverage but not qualify for catastrophic prescription drug coverage until after paying several thousand dollars out-of-pocket.
Determining which plan is optimal for an individual requires an analysis of income, medical history, savings, marital status and employment status (former and present). For individuals already retired, check out page 119 of the 2010 Medicare & You booklet produced by the Department of Health and Human Services to see a breakdown of Medicare costs.
As you plan for retirement, you should give great attention to the costs of health care. Fidelity has a tool to help you estimate your personal health care costs during retirement. The lesson you can extract after you catch your breath: save, plan and save some more.
Carolyn Humpherson
For further information on Medicare please visit www.medicare.gov.
[i] The information for this basic breakdown of Medicare coverage comes from the Social Security Administration Web site, http://ssa-custhelp.ssa.gov/cgi-bin/ssa.cfg/php/enduser/std_adp.php?p_faqid=167, and from the Medicare Web site, http://www.medicare.gov/publications/pubs/pdf/10050.pdf.
