Preparing for retirement is a lifelong project. There’s so much to consider and many expected costs that we need to prepare for. While some people work with a financial planner, it’s quite common these days for people to plan their own retirement without consulting a professional. Unfortunately, this can sometimes lead to things we overlook. One of the most common retirement expenses that people fail to plan for is the cost of healthcare. This can be a big retirement mistake because a study from Fidelity shows that an average couple aged 65 or so will need nearly $300,000 for healthcare costs in retirement.
Here’s what you need to know to properly plan:
Medicare Benefits are Not Free
Throughout our working years, we pay FICA taxes that go toward our future Social Security benefits and Medicare costs. Many workers assume that this means when they join Medicare someday their benefits won’t cost them anything.
What they don’t know is that their taxes during their working years only go toward paying their future Part A hospital benefits. Part A is only one part of Medicare.
Part B is your outpatient coverage, and this includes everything thing from doctor office visits and preventive care to chemotherapy and dialysis. Beneficiaries pay a monthly premium for Part B and that standard premium in 2019 is $135.50/month for most people. However, some individuals in higher earning brackets will pay considerably more for Part B, so it needs to be an expense that you plan for and incorporate into your estimated retirement expenses.
Most Medicare beneficiaries also need drug coverage, and Part D drug plans can range from $10/month to well over $150/month depending on which plan you choose.
You Also Pay Cost-Sharing as You Use Your Benefits
If you have health coverage now, you are probably used to paying some cost-sharing as you use your benefits. For example, most plans require you to pay a copay when you visit the doctor or emergency room. You also incur your deductible if you have more expensive healthcare treatment or spend a night in the hospital.
Medicare works the same way. You will be responsible for both a hospital deductible and an outpatient deductible. You must satisfy these deductibles first before Medicare will begin to pay benefits.
Lastly, Medicare Part B only covers about 80% of your outpatient costs. You are responsible for the other 20%. While 20% of a doctor visit isn’t too much money, paying 20% of the cost of outpatient surgery could be a significant chunk of change.
For this reason, many Medicare beneficiaries enroll in Medicare supplement plans to help them fill in the gaps. There are several plans to choose from and premiums for these plans vary by state. This is just one more monthly expense that you need to account for when planning out the costs you need to prepare for in retirement.
Long-Term Care is Not Covered by Medicare
Perhaps one of the most significant expenses that many people eventually incur is the cost of assisted living or nursing home care. It’s not a fun thing to think about but studies show that more than half of people aged 65 and older will eventually need a long-term care stay.
While Medicare does provide for short-term care costs in a Skilled Nursing Facility, Medicare does not pay for long-term care expenses. A study by Genworth reported that the average cost of assisted living in 2018 was $4000/month and a private room in a nursing home carried an average cost of $8365/month.
This one expense can easily eat up your retirement savings if you didn’t plan ahead and purchase a long-term care policy or save a significant amount of money that you have designated to pay for long term care.
So now that you’ve seen the types of costs related to the costs of healthcare in retirement, be sure to spend some time researching these costs and building them into your retirement savings plans. The earlier you start saving for these costs, the easier your financial picture in retirement will be.
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