Retirement health care costs

Key Points

  • Health-related expenses can deplete your retirement savings.
  • Government programs like Medicare only cover some medical expenses.
  • COBRA may be an option for recent retirees.
  • Consider insurance to help pay the cost of long-term care (LTC).

Planning ahead for health care expenses is essential. How much will you need? Your costs will vary based on your income, age, health, location, your Medicare or supplemental plans and life expectancy.

Evaluating retirement health care costs

The financial impact of dealing with a serious illness can be devastating, and even everyday medical expenses such as prescription drug costs and routine medical services can add up over time. Planning now can help ensure you have enough money to pay for health care throughout retirement.

Health care costs for retirees are considered likely to continue to rise. For example, by 2020 a 65-year-old married couple without an employer-based health plan and with median drug expenses could need a total of $365,000 to $454,000 to pay for Medigap, Medicare Part B and Part D premiums and out-of-pocket drug expenses.1

Introduction to Medicare

Medicare is a federal health insurance program that provides coverage for people age 65 and older, and for some disabled people under age 65. The program consists of four parts, each of which covers different health-related expenses.

Medicare Part A Medicare Part B Medicare Part C Medicare Part D
Hospital Insurance Medical Insurance Medicare Advantage Prescription Drug Plan
Helps pay for in-patient care in a hospital or skilled nursing facility (following a hospital stay), some home health care and hospice care Helps pay for doctors' services and many other medical services and supplies that are not covered by hospital insurance Allows you to participate in PPO-, PFFS, and HMO-type managed care plans Helps pay for medications prescribed by doctors
No premium if you and your spouse paid Medicare taxes during 40 or more quarters Optional coverage If you are enrolled in Medicare Part A and Part B, you are eligible to switch to Part C Pays outpatient drug care costs
  Requires a monthly premium payment for all participants2   Requires a monthly premium payment for all participants3
      Deductible and cost-sharing limits may apply. In the coverage gap stage, there are different cost sharing percentages for brand name vs. generic drugs

Several types of Part C plans are available, including:

  • Preferred Provider Organization (PPO). This plan allows you to see any doctor or specialist; however, visiting doctors outside your PPO network will involve extra costs.
  • Health Maintenance Organization (HMO). You have access to doctors in the HMO network only.
  • Private Fee-for-Service (PFFS). You can see any doctor who is willing to accept the fees and terms of the PFFS.
  • Special Needs. These plans are intended for people with certain chronic diseases or special health care needs.
  • Medical Savings Account (MSA). This plan includes a high-deductible health insurance plan and a savings account in which Medicare deposits money for you to use for health care costs.

Enrolling in Medicare

If you are already receiving Social Security, you are automatically enrolled in Medicare at age 65. If you want to enroll in Medicare but are not taking (or not eligible for) Social Security, you can enroll three months before the month of your 65th birthday and the three months after. For example, if your birthday is March 15, you can apply anytime from November through the end of June.

Medigap and Medicaid

Medicare is only one of the sources of health care coverage available to retirees. You may also be eligible for Medigap or Medicaid.

Medigap Medicaid
Individuals enrolled in Medicare Parts A and B are also eligible to purchase Medigap coverage from insurance companies. Individuals with limited income who meet certain requirements may also be eligible to receive Medicaid.
Coverage and costs vary by state. Medicaid is an insurance program sponsored jointly by states and the federal government.
Generally covers all or part of the costs not covered by Medicare, deductibles, co-payments and co-insurance Covers some hospital care, prescriptions and nursing home costs
Enroll through private insurance agencies. Enroll through your state's Department of Human Services.

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)

COBRA makes health coverage available at group rates for employees and their dependents who would otherwise lose health benefits when they retire, leave their job or have certain other qualifying events.

Qualifying event Maximum coverage period**
Reduced work hours < 20 week 18 months
Employment termination or retirement 18 months
Employee's death 36 months
Divorce, legal separation or annulment 36 months
Employee's enrollment in Medicare 36 months
Dependent child's eligibility ends by exceeding plan's age limit 36 months

**If there are multiple events, the coverage period cannot exceed 36 months.

Generally, employers with 20 or more employees are subject to COBRA. Coverage applies to employees, former employees and certain dependents who are or were covered under a group health plan. Benefits include medical, dental, vision, health care reimbursement and employee assistance programs.

Long-term care

The average duration of long-term care for a retiree is estimated to be about three years. While long-term care (LTC) costs vary widely by region and type of facility, the average cost for a private room in a nursing home in 2013 was about $84,0004 per year. That adds up to $252,000 for three years of care — a significant expense which is expected to rise significantly in the future. Medicare and Medigap policies offer limited, if any, coverage for LTC.

Gender can also have a significant impact on the cost of LTC because in general, women live longer than men. Today, 71%5 of nursing home residents are women2.

One way to plan for these costs is to purchase LTC insurance. Premiums for this coverage vary by company but are generally based on your age, health status and the level of benefit you are purchasing. Make sure that the benefit on your LTC insurance policy will be enough to cover the average cost of care in your region.

High-Deductible Health Plans (HDHP) and Health Savings Accounts (HSA)

A High-Deductible Health Plan (HDHP) may offer a practical way for retirees under age 65(and therefore not yet eligible for Medicare) to deal with their medical costs. HDHP differs from other health insurance plans because its high deductible allows the policy to be offered at relatively low cost.

If an HDHP meets certain requirements, the policyholder may also open a Health Savings Account(HSA) to pay for HDHP deductibles and other qualified out-of-pocket costs. Money withdrawn from the HSA to pay for qualified expenses is tax-free as long as the expenses were incurred after the HSA was established and funded.

For 2014, the maximum annual contribution rates to an HSA are $3,300 for an individual and $6,550 for family coverage. Those who have reached age 55 but are not yet age 65 may contribute an additional $1,000 for 2014.

You can use an HSA account to pay for medical expenses as they occur, or you can accumulate funds in the account to pay for future health care expenses. Note that any distributions taken prior to age 65 that are not used for eligible medical expenses are subject to income tax and a 20% penalty.

Insurance Exchanges

Beginning in 2014, public and private insurance exchanges became available to purchase coverage for individuals and small businesses.

An Ameriprise financial advisor can work with you to build a confident retirement that anticipates health care costs and other major expenses in retirement.

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