Medicare coverage gaps: Are you covered?
- New research shows a couple needs upwards of $273,000 to pay for health care costs in retirement
- From health savings accounts to long-term care insurance, planning ahead can be a game-changer
- Supplemental health care coverage options could also help protect retirement savings
It's critical to save in advance for medical expenses in retirement, according to new research.1 To have a 90% chance of covering medical expenses, a woman may need $147,000 and a man may need $131,000 saved by the Medicare eligibility age of 65.2 This includes expenses not covered by insurance, such as health care premiums and median prescription drug costs.
The good news is that there are solutions — and it’s not too late to begin implementing them in the years approaching retirement. First, a quick reminder of the most common Medicare offerings:
Medicare A-D: A quick guide
Nearly two-thirds of those surveyed in the Ameriprise study plan to work until they are old enough to qualify for Medicare — age 65 for most. Here’s what you need to know about Medicare coverage gaps as you prepare for the transition from employer-based or private insurance.
Why additional funds are needed for health care
With the aging of the large Baby Boomer population, America is getting older. At the same time, lifespans are increasing. And it’s common knowledge that as people age, health care needs often rise, leading to increased expenses. What you may not know is how the Medicare program is evolving to address this.
Medicare solvency program
Future retirees are likely to pay a greater portion of their health care costs in retirement due to the financial condition of the Medicare program, according to the EBRI findings. For example, in 2029 incoming payroll taxes and other revenue will only be sufficient to pay 88% of Medicare hospital insurance costs. This shortfall will need to be closed by raising revenues or managing growth in costs or, most likely, both.
Medicare high-income surcharge
Those with higher incomes already pay up to four times more than individuals with annual incomes of $85,000 or less ($170,000 or less for couples) for Part B premiums. If your income is above those limits, you’ll pay incrementally more than the standard $134 monthly premium, maxing out near $430 per month for individuals with incomes of $160,000 or more ($320,000 for married couples).
Coverage offering cuts
Another kink in the works: Due to a 2015 bill passed in Congress, in 2020 new Medicare beneficiaries will no longer be allowed to purchase Supplemental Medicare coverage (“Medigap”) Plans F or C, which include:
- Plan F: One of the most comprehensive Medicare supplemental insurance plans: it pays for, among other fees, the Part A deductible, Part B deductible and Part B excess charges.
- Plan C: Similar to Plan F, but it does not cover the excess fees that doctors charge over Medicare’s limits.
However, if you’re turning 65 before 2020, you can still enroll in one of these plans.
A bright spot: Medicare Advantage
Medicare Advantage plans, sometimes called “MA Plans,” are offered by private companies approved by Medicare, which pays these companies to cover your Medicare benefits.
An act passed by Congress in 2018 gives Medicare Advantage plans more flexibility to cover “non-medical” benefits such as:
- Simple aging-in-place modifications to homes
- Telehealth services (receiving health care remotely through electronic means)
- Expansion of access to home dialysis therapy
Medicare Advantage plans include Medicare Part A coverage (hospital and hospice care) and Part B coverage (doctors’ visits and routine medical care.) They also can encompass prescription drug coverage, vision and dental insurance.
What you can do now
Nearly 6 in 10 people expect Medicare to pay for most or all of their health care costs in retirement.3 Yet, basic Medicare Parts A, B and D don’t cover routine dental care, eye exams, hearing aids and some of the other most common medical needs in retirement.
Medicare Advantage or private insurance can help pay for a broader spectrum of health care costs, but a wide range of options means you’ll want to begin comparing plans well in advance of Medicare eligibility — which currently is age 65.
Now is also a good time to beef up your health savings account (HSA) if you have this benefit as part of a high-deductible health plan through your employer. The 2018 annual contribution limit is $3,450 for individuals ($6,900 for a family), with a catch-up allowance of $1,000 a year for those age 55 and older.
Those modest savings can really add up. After 10 years of contributing the family maximum amount plus the catch-up amount at a typical 2% rate of return compounded monthly, you’d have an extra $98,000 socked away for health care expenses.4
Potential HSA savings for a couple over a 10-year period
The long-term care factor
The average 65-year-old has close to a 70% chance of needing some form of long-term care in the future, and many Americans are under the impression that Medicare or Medicaid will cover their assisted living costs.
Medicare Advantage only covers limited in-home care – not assisted living. And Medicaid kicks in for long-term care only after a person has first spent down all of their own assets on care. Retirement savings and real estate, other than one’s primary home, are considered assets subject to Medicaid spend-down requirements. In many states, however, having long-term care insurance (LTCI) offers protection from Medicaid requirements. For example, if you purchase an LTCI policy and it pays $50,000 in benefits, you are allowed to keep the $50,000 over the asset level you would otherwise need to meet to be Medicaid eligible.
Taking out a policy in your 50s may mean lower premiums as well as a greater likelihood of passing the health care exams most providers require. Some newer LTCI policies offer hybrid coverage so that unused funds can be passed on to your heirs.
We can help
As you approach retirement, work with your advisor to shore up your savings, research supplemental coverage options and explore your long-term care insurance needs. Before you purchase insurance, be sure to consider the policy’s features, benefits and fees and whether it is appropriate for you, based on your financial situation and objectives.