How To Estimate Medicare Costs In Retirement


Should You Use A Retirement Planning Calculator To Estimate Health Care Costs

Medicare inflation threatens retirement security as drugs, Covid and staffing drive up health costs

Only one-third of older Americans have taken steps to save money theyll need in retirement for out-of-pocket medical expenses, according to AARP. But when it comes to retirement and good living, its important to save for retirementespecially for health care. Although budgeting for housing and other activities is a great start, aging often means higher health care expenses. Not planning for these costs could derail some of your plans if you have to reallocate funds you set aside for, say, a trip overseas, to cover an emergency surgery. Luckily, there are a number of retirement planning calculators designed to help you figure out how much you might need.

So how much do you need? The average couple retiring today at age 65 will need $260,000 to cover their health care costs in retirement. But depending on your age, income, health, location and Medicare eligibility, that number could be much different.

Online calculators that estimate your future health care costs can help you set an appropriate savings goal. However, they can be unreliable since they dont always ask enough questions. Many, for example, do not take into account long-term care, the cost of which can quickly break your health care budget. On average, a semiprivate room in a skilled nursing community costs more than $82,000 per year. And if you want a private room, it will cost you in excess of $92,000 per year.

Tool: AARP Health Care Costs Calculator

The Lowdown On The Best And Most Cost

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

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Planning for retirement includes obtaining appropriate and affordable healthcare coverage. In that respect, for Americans 65 and older, any conversation about healthcare must include Medicare. Eligibility at age 65 means that health insurance becomes more affordable.

When you retire, its important to understand how Medicare works and how you can get the best and most cost-effective coverage. Many retirees wonder how to determine whether they need all four parts of Medicare. Questions about Medicare costs, supplemental insurances, and enrollment periods often arise as well.

Many Americans Don’t Have A Clue About Health Care Costs In Retirement

Americans are vastly underestimating the amount of money they need in retirement for healthcare costs.

The average estimate from folks in a recent Fidelity survey was just $41,000. In fact, Americans will spend nearly eight times that amount in their golden years, according to the new Fidelity Retiree Health Care Cost Estimate, which forecast a retired opposite sex couple age 65 in 2022 may need an average of $315,000 saved to cover health care expenses in retirement.

Fidelitys estimate is up 5% from 2021 and has nearly doubled from its original $160,000 in 2002. The 2022 estimate for single retirees is $150,000 for men and $165,000 for women.

Our research indicates a persistent lack of understanding around what people need to do to save for health care costs in retirement and just how much theyll need to have saved, Hope Manion, senior vice president at Fidelity Workplace Consulting, told Yahoo Money.

Too often conversations about retirement focus on the fun parts, like where youll live or travel, or the extra time with family and friends, but its important to consider how youll pay for not only those happier moments, but also the inevitable costs of health care in retirement.

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Medicare Supplement Insurance :

  • Monthly premiums vary based on which policy you buy, where you live, and other factors. The amount can change each year.
  • You must keep paying your Part B premium to keep your supplement insurance.
  • Helps lower your share of costs for Part A and Part B services in Original Medicare.
  • Some Medigap policies include extra benefits to lower your costs, like coverage when you travel out of the country.

Estimate The Tax You Will Owe On Retirement Income

2020 Medicare Costs

Unless your only source of funds is Social Security, it is likely you will pay taxes in retirement. You can use an estimated tax rate, such as 25%, which is better than not accounting for taxes at all. However to come up with an accurate dollar amountand to set up your tax withholding or quarterly paymentsyou will need to do a tax projection.

A tax projection is an estimate that you do before year-end that shows you what your tax return will likely look like. Tax projection is important if you have mortgage interest, rental properties, or the majority of your retirement income will come from investments that are not inside of a retirement plan.

If you have pension income or if the majority of your retirement income will come from qualified retirement plans such as IRAs or 401s, and your home is paid off, your tax rate in retirement may be higher than you expect. Examples of pension plans include military retirement and payments from estates of which you may be the beneficiary.

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Know Your Health Insurance Options

What are your options for healthcare in retirement?

The obvious answer is Medicare. But what exactly do you get when you sign up for Medicare? It consists of four parts Parts A, B, C, and D:

  • Part A covers hospital care, most skilled nursing facilities, and hospice/home health services. If you previously paid more than 40 quarters of Medicare payroll tax while working, Part A is premium-free.
  • Part B covers doctor visits, clinical lab services, outpatient and preventive care, screenings, surgical fees/supplies, and physical and occupational therapy. The premiums for Part B are based on your modified adjusted gross income reported on your tax return from two years ago.
  • Part C combines parts A and B and can also include prescription drug coverage. The premiums are based on the type of plan you choose and what is covered by the plan.
  • Part D covers your prescriptions. These premiums are also based on your MAGI as reported on your tax return from two years ago.

You may need other types of insurance during retirement besides Medicare to help cover the costs of unexpected events. A previous employer or union may offer retirees a health insurance plan that supplements Medicare coverage.

Another option to consider is a Medicare Supplement Insurance policy, also known as Medigap. This type of health insurance is purchased through a private company and can help to pay for any out-of-pocket costs not covered by the Medicare plans above .

Getting Additional Health Insurance For Retirees

Unlike some other types of health insurance plans, Original Medicare has no out of pocket maximum. Medicare Part A generally doesnât pay for your inpatient hospital days after your lifetime reserve days are used up or skilled nursing facility care costs beyond your 100th day. For both inpatient hospital care and skilled nursing facility care, you may have a coinsurance payment that can add up to thousands of dollars. Having a serious illness is concerning enough without worrying that your health insurance for retirees wonât cover your care.

Some people get peace of mind about their health care costs by getting a Medicare Supplement Insurance plan. Medicare Supplement Insurance plans pay certain out-of-pocket costs including coinsurance, copayments and deductibles. Some Medicare Supplement Insurance plans even have out-of-pocket maximums.

There are up to 10 Medicare Supplement insurance plans labeled with letters A, B, C*, D, F,* G, K, L, M and N. Different plans may cover Medicare out-of-pocket costs to different extents, but they all cover 100% of the Medicare Part A coinsurance and hospital costs up to an additional 365 days after Medicare benefits are used up. If you face an extensive hospitalization, this coverage may save you thousands of dollars in out-of-pocket costs.

*Plans C and F are being phased out, and are no longer available to people who qualified for Medicare after 2019.

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Add Final Expense Insurance

According to the National Funeral Directors Association, the national median cost for a funeral with burial is $7,181. A final expense insurance plan can pay for that.

A final expense plan can also be used for other final expenses, including medical bills or debt.

Many of our clients prefer a final expense plan over prepaying a funeral home.

To help you factor in that monthly cost to your overall Medicare plan, weâve added a section to our Medicare Cost Worksheet.

And hereâs what it could look like filled in:

What Will You Spend On Health Care Costs In Retirement

Retirement Report: Health Care Cost in Retirement P.3

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Health care costs make up 9% to 14% of the average older households spending. But what you will spend on health care costs in retirement could be less or potentially a lot more.

A 65-year-old woman typically could expect to pay $3,300 to $7,700 annually for premiums and out-of-pocket medical, dental and vision costs in 2018, according to a study by Vanguard Research and Mercer Health and Benefits. But her costs could top $21,800 in some scenarios, the researchers found.

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How Can I Use Hsa Funds

HSA withdrawals to cover qualified medical expenses are tax free. This gives them a major advantage over IRAs or 401s, which require taxes to be paid on withdrawals.

If you are younger than 65 and you withdraw the money for other purposes, you will owe a 20 percent tax penalty. However, if you are older than 65, withdrawals for other purposes are taxed the same as withdrawals from other qualified retirement savings accounts, such as 401s.

Qualified health expenses include things not covered by Original Medicare, such as dental care and hearing aids. Some Medicare Advantage Plans offer extra benefits that Original Medicare doesnt offer, such as vision, hearing, and dental.

HSA funds can also be used to cover specific health insurance premiums:

  • Long-term care insurance
  • Health care continuation coverage
  • Health coverage while receiving unemployment compensation
  • Medicare and other health coverage if you are 65 or older

To get the most out of your HSA for retirement savings, you should contribute the maximum possible. If you can avoid it, dont use your HSA funds for medical expenses before retirement. Consider this money earmarked for your retirement health care costs.

Also, shop around for HSA administrators that allow you to invest the money in high-quality, low cost options.

Things To Remember When Calculating Health Care Costs In Retirement

The idea that your retirement will be filled with fun, travel, family time and relaxation is the ultimate goals for all retirees. The reality for many, though, is a bit more stressful. Considering these few things when attempting to calculate your health care costs in retirement will better ensure an accurate figure, offering you greater peace of mind in your golden years. Budget for the non-covered expensesMany services needed by the elderly are not covered under Medicare such as dental, hearing and vision services. Do not forget to account for these in your budget. Coinsurance and deductiblesDo your due diligence to research possible deductibles and coinsurance you will be responsible for in retirement. Supplemental insuranceWeigh the costs and benefits of purchasing supplemental insurance to fill the gaps. SaveSave, save, save and save some more! Dodge the penaltiesEnrolling late in Medicare sticks you with unavoidable lifetime penalties. Dont be late or you will spend forever paying for it. Literally.

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How To Plan For Health Care Costs In Retirement

Gordon Scott has been an active investor and technical analyst of securities, futures, forex, and penny stocks for 20+ years. He is a member of the Investopedia Financial Review Board and the co-author of Investing to Win. Gordon is a Chartered Market Technician . He is also a member of CMT Association.

David J. Rubin is a fact checker for The Balance with more than 30 years in editing and publishing. The majority of his experience lies within the legal and financial spaces. At legal publisher Matthew Bender & Co./LexisNexis, he was a manager of R& D, programmer analyst, and senior copy editor.

How do you account for health care costs in your retirement planning? If you’re like most people, you’re underestimating these expenses.

Although Medicare Part A, which covers some level of hospitalization, is free , the bulk of Medicare coverage is not free. You’ll pay premiums for Medicare Part B, and for supplemental insurance or prescription plans. In addition, you’ll have out-of-pocket costs.

When you factor all of this in, it is estimated Medicare will cover only about 50-60% of your healthcare needs. And, over time, premiums and out-of-pocket costs will go up.

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Tax Brackets 2020 For Medicare

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Do I Have To Sign Up For Medicare If I Have Private Insurance

It depends on the type of insurance you have and your place of employment. If you are self-employed or work at a small business with less than 20 employees, double check that you will still be covered past 65. If you have COBRA coverage, make sure to sign up for Medicare. If these do not apply to you, and you’re still covered by your health insurance, you can put off signing up for Medicare.

If You Have Medicare How Much Will Healthcare Cost In Retirement


Medicare beneficiaries in good health spend far less on insurance premiums and medical services. Here are ways to calculate your possible expenses, and find ways to cut costs.

How much might you spend on healthcare in retirement? Well, more than a few researchers have chimed in on that subject, including those at T. Rowe Price, New York Life, and Vanguard and Mercer Health & Benefits. Now AARP is weighing in.

In its report, Medicare Beneficiaries Out-of-Pocket Spending for HealthCare, AARP found the following:

In 2018, people with traditional Medicare spent an average of $6,168 on insurance premiums and medical services. They spent almost half of that money on Medicare or supplemental insurance premiums. The remainder was out-of-pocket spending for healthcare services that Medicare covers and for those that the program does not cover .

From TheStreet’s Retirement Daily:

Of note, monthly premiums for a Plan G in 2020 ranged from $90 to $170, depending on your age and state, according to MedicareFAQ.

One in 10 people with traditional Medicare spent at least $10,816 in 2018 and the top quarter of spenders paid an average of $14,123.

Healthcare expenses can create a significant financial burden for many Medicare beneficiaries, with half the people with traditional Medicare spending at least 16% of their income on healthcare.

One in 10 beneficiaries spent at least 52% of their income on healthcare.

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What Does The $315000 Include

About 15% of the average retirees annual expenses will be used for health care-related expenses, including Medicare premiums and out-of-pocket expenses.

Obviously, that figure comes with caveats because ultimately what a retiree will spend depends on when he or she retires and where they live, their overall health, and that great mystery of how long they will live.

Fidelitys estimate assumes both members of the couple are enrolled in traditional Medicare, which between Medicare Part A and Part B covers expenses such as hospital stays, doctor visits and services, physical therapy, lab tests and more, and in Medicare Part D, which covers prescription drugs.

The calculation takes into account monthly premiums, standard Medicare cost-sharing provisions, expenses that arent covered by Medicare like vision or hearing aids, as well as prescription drug out-of-pocket costs.

It does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care.

How Much Does Health Care Cost In Retirement

Medicare inflation threatens retirement security

According to a report by HealthView Services Financial, a healthy 65-year-old couple retiring in 2019 can expect to spend more than $387,000 for retirement health care costs, not including long-term care.

This projection is based on the current value of the U.S. dollar and includes Medicare premiums, the costs of supplemental insurance and other out-of-pocket expenses for a man whose life expectancy is 87 and a woman whose life expectancy is 89.

Estimated annual health care costs, not including long-term care, for an average, healthy 65-year-old couple retiring in 2019


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Calculating Health Care Costs In Retirement

Do you understand the link between health care costs in retirement and your financial security? Many do not. We are here to help you draw a link between the two, which will ultimately lead to a better understanding of the importance of each. Our health care cost retirement calculator will give you the opportunity to estimate your health care costs prior to retirement, allowing you to properly prepare by factoring this figure into your future financial plan.

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