By Eric Rosenberg, WCI Contributor
As a medical professional, you likely have a good understanding of what it costs when you need to see a doctor, have tests, or undergo a procedure. Even if you’re healthy today, there’s a good chance that you will experience increasing healthcare costs in retirement. Those costs come from insurance premiums, deductibles, copays, coinsurance, and any other payment to a doctor, hospital, pharmacy, or health insurance provider.
The average retiree may see healthcare costs reach six figures during their golden years. And costs will likely be higher if you retire early. Here’s a closer look at healthcare costs in retirement so you can build a resilient financial plan before you get there.
Average Cost of Health Insurance for Retirees
If you’re self-employed, you already know how much health insurance costs. If you’ve worked for an employer, which might pay for most (or all) of your health insurance, you may have a little sticker shock the first time you pay an entire month’s premium on your own.
Before retirement, you can go through a health insurance marketplace or a private insurer for an average cost of around $500 per month just for you and $1,200 per month for a family (however, that can vary widely based on location and coverage). Once you retire, your costs will change for the better, thanks to Medicare. If you or a spouse paid Medicare taxes over your career, Medicare Part A is available for free. Part B coverage is required and currently costs $170.10 per month or more [2022], depending on your income (it will drop to $164.90 in 2023]. You will also probably want a Medicare Advantage Plan, which costs an average of $25 per month for supplemental coverage.
That total ranges from around $500 per month on the higher end when you get insurance on your own to about $200 per month with Medicare.
How Much Should I Budget for Healthcare in Retirement?
According to HealthView Services—a healthcare costs management company—the average cost of healthcare for a 65-year-old couple is $12,286 per year, a little more than $1,000 per month. That’s projected to triple by the time current retirees turn 85. They can expect to pay nearly $3,000 per month for full coverage, including Medicare Part B, Part D, Medigap, and typical medical care needs.
While Medicare can help lower costs once you reach 65, plenty of costs remain. The study suggests a total cost of $387,644 in today's dollars or $572,960, factoring in future expected inflation.
How to Lower Retirement Health Care Costs?
Keeping your healthcare costs low in retirement takes a combination of luck, good health, smart insurance, and good healthcare purchasing decisions. While we can’t change your luck from the genetic lottery and while you’re on your own to eat healthily and exercise, we can offer common strategies to keep retirement healthcare costs in check.
- Pick the best insurance plan for your needs: To start, you should spend time thinking about your care needs and costs. If you need a high level of care, it could be worth paying more every month in premiums for more extensive coverage.
- Shop around for insurance: You probably shop around when buying new, expensive items or services. That should go for health insurance, too. Medicare, HMOs, PPOs, and other plans have different costs and benefits.
- Shop around for healthcare: While many patients don’t think about it, shopping around for lower-cost healthcare is becoming more popular and more accessible thanks to the internet. If you can find two doctors that offer the same service but one charges more, there should be a very compelling reason to go with the higher-cost option.
- Stay healthy: As a doctor, you know that diet, exercise, and lifestyle choices have a significant influence on health and healthcare needs. If you are healthy and need less care, you can save money.
- Use a Flexible Spending Account (FSA) or Health Savings Account (HSA) when available: If you have access to an HSA or an FSA, you can use this account to save on taxes related to healthcare spending.
How Do I Prepare for Healthcare Expenses in Retirement?
If you will have $300,000-$600,000 in healthcare costs in retirement, it’s imperative that you start saving and investing as early as possible. Take full advantage of retirement plans, save and invest heavily, and do what it takes to get your finances lined up for the future.
How to Pay for Healthcare in Retirement?
In most cases, you will use a mix of tax-advantaged accounts and taxable investments to pay for healthcare in retirement. A 401(k), HSA, and IRA are likely to play the most important roles in paying for retirement healthcare needs.
Make sure to consider healthcare when deciding how much is enough for retirement.
How Does Medicare Fit into Healthcare Costs?
If you’ve been legally working in the United States, you’ve probably spent years paying Medicare taxes. Medicare taxes are 1.45% of your paycheck, which your employer also matches.
This tax unlocks access to Medicare for health insurance when you retire or meet other, less common criteria. Medicare insurance is provided in four parts, which you may have to buy separately.
- Part A: Medicare Part A covers hospital visits after reaching an annual deductible.
- Part B: Part B is optional (and probably an excellent idea for you) and covers medical expenses. This requires an additional premium payment.
- Part D: Part D is for prescription drug coverage. In your old age, you may take several prescription medications. This is unnecessary for some people, especially if you get prescription coverage through a supplement. Check with your plan administrator or a trusted insurance professional to determine if you still need this coverage when you buy a supplement.
- Supplemental: Sometimes called Medigap, supplemental Medicare insurance is a private insurance company that covers additional medical expenses not included in Medicare Part A or B. These are Part C plans, but most people don’t use the term Medicare Part C when discussing supplemental Medicare health coverage.
Keep in mind, though, that you can only unlock Medicare when you reach the age of 65. If you retire before then, Medicare probably won't be accessible to you. (Exceptions include being disabled or on dialysis).
According to a study by Fidelity Benefits Consulting, 39% of your healthcare spending in retirement will go to healthcare premiums, 17% for prescription medications, and the remaining 44% for doctor and hospital visits and related payments.
What Does Medicare Cover (and Not Cover)?
Between Medicare Part A, Part B, and Part D, you should be reasonably well covered for most hospital visits, nursing facility stays, hospice care, lab tests, surgeries, home healthcare, doctor visits, medical equipment, outpatient care, preventative screenings, and medications. But there are some gaps in coverage, which is why Medigap supplements exist.
Medicare specifically does not cover:
- Long-term care
- Most dental care
- Prescription eye exams and glasses
- Dentures
- Cosmetic surgery
- Acupuncture
- Hearing aid exams and hearing aids
- Foot or podiatry care
Supplemental plans can also be called Medicare health plans. A common type of plan is called Medicare Advantage, which most retired doctors should consider. Medicare Advantage plans often follow standard HMO or PPO formats.
The largest Medicare Advantage plan is the AARP Medicare Advantage plan from United Healthcare. High-quality Medicare Advantage plans cover most prescription drugs; dental care; eye care, including glasses or contact lenses; hearing aids and related tests; and other benefits.
Should I Buy Long-Term Care Insurance?
Long-term care insurance covers the costs of staying in a nursing home, moving to an assisted-living facility, or having a home healthcare provider come to your home. That may be a real need when you’re in your old age, and this type of care can be costly. Experts are divided on whether purchasing long-term care insurance makes sense.
A survey from Genworth found that the median cost for a semi-private room in a nursing home costs about $8,000 per month, while a private room costs $9,000. But that’s the median, so half of nursing home stays cost more. Home healthcare costs about $5,000 per month.
Because these costs can be so high, the ROI could be terrific if you wind up needing long-term care. However, the high premiums could make it a poor investment.
Ultimately, it’s up to you to decide if the risks and benefits make paying for long-term care a good idea. Also, if can save and invest enough that you can cover these costs on your own, you could self-insure and go without long-term care insurance. Most white coat investors choose to simply self-insure as they retire as multimillionaires.
As always, becoming financially independent makes all of these healthcare-in-retirement questions just a little easier to answer.
If you need extra help with planning for retirement or have
questions about the best way to save your money, hire a WCI-vetted professional today.
What are your plans to pay for healthcare costs after you retire? Will you buy long-term care insurance? Comment below!
As a retired physician, who worked as medical director of a large Insurance Company that offered a Medicare Part C plan for retirees, I’m very familiar with Medicare. I also understand that the terminology can be quite confusing.
Medicare Advantage plans are different from Medicare supplemental Insurance which are also known as medigap insurance. The author of this article mistakenly uses these three terms interchangeably, and they are not. (https://www.medicare.gov/basics/costs/medicare-costs)
You failed to mention that private insurance is required to have a maximum out-of-pocket annually due to the Patient Protection Affordable Care Act (Obamacare), but Medicare does not. You get to pay 20% of all health care costs with no cap, unless you buy a Medicare supplemental plan. Or a Medicare Advantage, AKA Medigap plan.
Starting next year, there is a maximum out of pocket for part D, prescription drug coverage. But for Medicare part A and B, there is not.
Also, Medicare Part C, known as Medicare Advantage plans. This replaces Medicare part A, Part B and part D, if you so choose.
Medicare supplemental plans (also known as Medigap plans) are different. They merely cover your expenses once you hit a certain out-of-pocket maximum for Medicare part A and part B. I know this because I have a supplemental plan that is not an advantage plan. And you pay for this Medicare supplemental insurance in addition to your Medicare premiums for Part B and part C. (Most people are not charged a premium for part A)
Other than that, this appears to be an excellent article. Thank you.
Medicare delivery is divided into two types. One is traditional Medicare, in which the government pays 80 % of the covered costs of medical care after the deductibles, which are over $1000 for hospital stays or around $200 for doctor visits, medical equipment, etc. There is no cap for out-of-pocket costs in traditional Medicare, so the 20% you are responsible for can really add up if you have a condition that requires extensive treatment. That is why almost everyone on traditional Medicare, as we are, buys a supplemental Medigap plan. These are private insurance plans that come in a variety of coverages, standardized by the government, and are named according to letters. Our plan is a Plan G, and it covers all ou-of-pocket costs not covered by Medicare after the Medicare Part B deductible, which in 2022 was around $200. It will not cover costs that Medicare deems ineligible, but anything Medicare covers, the Medigap Plan G will cover. We are ages 68 and 70. The Medigap plans charge us $119 and $148 each month.
The great advantage of traditional Medicare is that you can go to any physician or facility anywhere in the US at any time with no referrals. There are no networks with traditional Medicare. There are no co-pays or co-insurance with traditional Medicare and a Medigap Plan G. Once you have paid for the Part B deductible, the only thing you pay for are premiums. You do have to also buy a Plan D for drug costs, but that is relatively inexpensive,
The other type of Medicare delivery type is Medicare Advantage, also known as Medicare Part C. This is confusing because these are not paid for directly by the government. Medicare Advantage plans are private insurance plans that are given a certain amount of money by the government every year and then they pay your bills. The premiums are cheaper than Medigap, usually (you still have to pay the $170 for Part B, taken out of Social Security), but there are doctor and facility networks that you must go to or pay more, there are co-pays and co-insurance, and the out-of-pocket maximum can be quite steep–around $7000 for in-network care, $11000 for out-of-network care. They do often include some coverage for costs not covered by Medicare, such as eye exams and dental exams. They also include a Part D plan for drug costs. But as described, there can be additional costs and limitations as to choice of physicians.
The government is not allowed to advertise traditional Medicare, so many people are confused on this issue. All you hear on TV are the celebrities touting Medicare Advantage. Occasionally a Medigap supplement will be mentioned, but the overwhelming number of ads are for Medicare Advantage. If you go with an Advantage plan, be very sure you know what you are getting into
We chose to go with traditional Parts A, B, and D with a private supplemental plan (to provide Catastrophic coverage, because there is no cap on Medicare).
We value the ability to go to any doctor that accepts Medicare without worrying about restrictive networking.
Why did you buy something to provide catastrophic coverage if there is no cap?
please correct mismatch between Medicare part B required or optional (between paragraphs 4 and 20).
Seems to me you well covered what the plans will cost to have coverage but please remind us of the copays- and what a medicare advantage plan covers of those. We got it great (I think- I’ll decide once I am actually paying for and using Tricare for Life and Medicare) with Tricare now and soon Tricare for Life (but guess we have to pay for Medicare Part B or something for that to function as our secondary insurance) but my mom on more limited means (and luckily fairly healthy for 80s) is paying 20% of all her bills apparently, and 100% for those not covered (guess some Medicare gap plans would help with those sorts of bills- wheelchair ramps, glasses, dental care?) on top of the invisible deduction from her social security. (My MIL has Tricare for Life and apparently hasn’t noticed the deducted cost of Medicare from her Social Security. We are careful not to evaluate that too closely since she would be pretty mad about that after her husband was promised free health care for life for them in the 1960s.)
For many of us WCI folk we will have to start paying for Medicare somehow at 65, 5 years before we start our social security 70. I volunteer to write the article about that process once I go through it if it is article worthy.
I really never thought much about insurance costs until I finished full time work which had a free family HMO/dental/vision with $2000 for HSA yearly.
Now, as a part time (two days a week) employee with no coverage…my costs for the family are about $14,000 per year…and we have no dental/vision yet.
My own policy is $6400 per year and excludes pre-existing conditions for a year. My stage 1A melanoma removal last year did not help. My wife and two youngest have a $5600 yearly Cigna plan, but since my 22 year old is taking a gap year and applying to graduate school, her policy is also separate (as she is not in school) and it costs $1759 per year.
Health insurance has jumped up to our biggest expense after taxes as our retirement home mortgage is only $11,000 per year.
My prior employer sent my OBRA paperwork after the expiration date, but it too was quite expensive. An “Obamacare” policy for me alone was even more (I guess because I qualify for no subsidy and it covered pre-existing conditions).
Yea it’s funny that people think health care costs should be similar to cell phone costs. In reality,. they’re more like grocery costs. They’re a major expense because health care is, well, expensive.
I did budget $1100 a month for insurance but it’s more than that. Our “restaurant/vineyard” amount was also too low …and I left out “major improvements” like a new front door, and a new kitchen sink/counter/backsplash, but I have a lot of proceeds from the big house to tap for these chunks.
Luckily, I’m still making more than the budget easily with two ten hour days a week, some call, and one long weekend a quarter.
Monthly:
Mortgage. $920
Property taxes $325
Electric/LP. $200
Groceries $1000
Internet. $135
Gas. $200
Cell phones. $300
Insurance-home $100
Car insurance. $400
Car maintenance/repairs $100
House maintenance/repairs $200
Life insurance. $100 (drops out at 62)
Disability insurance $200
Entertainment. $1000 (dining out, etc.)
Vacations. $1000/month
Misc. $750
Lease Mazda. $415
Health insurance $1100 a month
This is $8500 per month in expenses, plus taxes. I’m sure it will need some further adjustments. For example, I don’t have any retirement contributions in the budget and will add them, and we have no vision/dental yet. Our HSA will cover several years worth of copays, I think.
It still seems low, like I’m missing some items. This is only about $100,000 and if you add taxes, I think it’s about $130,000 of needed income (counting all taxes as 20%). Anyway, I’ve got quite a bit of “wiggle room.”
I’m not exactly sure how to do the retirement contributions. I use a SEP on my side gig, but the two day dealio is W2 income. Can I use a solo 401K on that if the pass through has no 401 plan?
No. IRAs and taxable are your only options for employment earned income when the employer offers no retirement accounts.
Looks like we may qualify for a Roth in 2023.
I’ve already put in the maximum 2022 yearly 457 contribution and my 401A with match through July. My 2022 SEP contribution will be due in April 2023 for my last year of high side gig income.
Our tax situation will be markedly different for 2023 with less than half our prior income. Looks like a $7500 Roth IRA and a small SEP contribution might be it.
We may not have to itemize.
You could always access a Roth IRA, but previously it had to be via the back-door.
Medicare does cover foot care and podiatry. It does not cover routine foot care unless the patient has certain medical conditions.
I do not see any mention of IRMMA, which is means tested increase in Part B and Part D payments (Medicare Income-Related Monthly Adjustment Amount ):
https://www.ssa.gov/forms/ssa-44-ext.pdf
This can be a significant amount that is calculated for each of the Medicare recipients and is worth knowing about when deciding on how much to withdraw from IRA or how much you make from sale of a primary residence, since it is a “cliff” –if you are 1 dollar over, you pay more each month. The payments are based on your income tax return from 2 years prior.
IRMMA is interesting because its phaseout doesn’t begin to kick in until $91K/$182K and isn’t final until $500K/$750K. That’s very high for a phaseout. Especially for something that ought to be a pretty trivial expense long before those numbers. The difference between full phaseout and no phaseout is just $408.20 a month, or just under $4,900 a year. I would hope that is an amount that doesn’t affect your lifestyle at all at $182K, much less $750K. For those singles who hit is at $91K, it’s only $68 a month more, or $816 a year until you hit $182K. I really don’t think anyone should be doing ANY significant financial planning around this little figure because it really shouldn’t be significant.
https://hr.harvard.edu/files/humanresources/files/medicare_irmaa.pdf
The irritating thing about IRMAA is the stepwise adjustment. Going a dollar over an IRMAA tier can cost an extra $2800 in Medicare fees for a household with 2 folks on Medicare. You are right, we can likely afford it, but paying $2800 because our MAGI was a few dollars too high would be painful. It is worth paying attention to once one is 63 yo, since MAGI from 2022 is used to calculate 2024 costs.
Yea, it is one of the few places in the tax code where making one extra dollar can really cost you a lot in tax.
But let’s be honest, IRMAA isn’t something one should do much financial planning around. Few pay it at all and rarely does someone pay the whole thing. I mean, $750K in AGI (MFJ) is a ton of retirement income.
Hey Eric. You seemed to have missed the mark here. Your comment: “A common type of plan is called Medicare Advantage, which most retired doctors should consider.” – should actually read “A common type of plan is called Medicare Advantage, which should be avoided by everyone and should never be considered.”
You state: “You will also probably want a Medicare Advantage Plan, which costs an average of $25 per month for supplemental coverage.” I am pretty sure that a Medicare Advantage Plan replaces traditional Medicare, so it cannot be “added”.
The Advantage plans have very low premiums, most of them are “free” but that is because they end up being a hassle and cost more in the long run.
Additionally, you can only automatically qualify for a medigap plan within 6 months of signing up for Medicare. After that time frame you will need to have good enough health to qualify for a medigap plan, so the time to get a medigap plan is when you sign up for Medicare. You are risking not being able to get one later as your health deteriorates.
Signing up for Medicare at 65 and getting a medigap plan at the same time is how you plan to avoid high healthcare costs in retirement.
I do not have any association with Chris other than to follow his channel, but he probably describes the scam of Medicare Advantage best in what he shared this last week: https://www.youtube.com/watch?v=TyH7E51aWHs
Thanks for sharing. This is a poorly understood area of personal finance.
Wow! This thread highlights the ongoing “exceptionalism” of the USA.
My understanding is that Medigap plans do not provide a cap on out-of-picket expenses but some Advantages plans do