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I RECENTLY STUMBLED on a retirement planning blog listing the top 10 regrets of retirees. Planning for health care costs was among the things that people wish they’d handled differently.
The site had this suggestion: “Before you retire, you should get a reasonable estimate of your health care costs and make sure you can afford them. Medicare does not cover everything and most people spend hundreds of thousands of dollars in out-of-pocket health care expenses in retirement—not even including funding a long-term-care need.”
This statement is scary—and very misleading. Those “hundreds of thousands of dollars” include decades of premiums for Medicare and supplemental coverage. This doesn’t represent one big chunk of money due all at once, but rather a reasonably predictable ongoing expense, just like property taxes or rent.
I often wonder why retiree health care costs are presented in such a frightening manner. Let’s consider a more realistic view of health care spending.
In retirement, for those age 65 and older, annual out-of-pocket medical costs will be very low and perhaps even zero. Medicare and supplemental insurance pay virtually all charges, except for the Part B deductible, which is $240 in 2024. Medicare Part B covers out-of-hospital medical care, including doctor visits.
What if you retire before age 65? Typically, your best bet is to buy insurance through your state’s health-care exchange, for which you may receive a government subsidy. Once you reach 65, your primary health care expense will be your various monthly Medicare premiums, which will vary in part based on your age and location. The standard monthly Medicare premium is $174.70 in 2024.
Medigap Plan G, the most popular supplemental coverage, reimburses out-of-pocket costs except the Part B deductible. The monthly premium starts at around $250, but can be higher depending on the insurance company and where you live. There are also cost variables based on how the premiums are set. Premiums can be:
I have attained-age coverage because I didn’t need Medicare supplemental insurance until my employer eliminated its retiree health coverage when I was age 77. My premium for Plan G is currently $273.41 a month, while my wife is charged $261.84. Over 25 years, our Medicare and Medigap premiums would total some $160,000, ignoring inflation.
Add it all up and, yes, it is indeed hundreds of thousands of dollars. But it isn’t due all at once, but rather slowly over the decades. The fact is, if you calculate any ongoing expense over 25 years, you’ll get a big, scary number. My property taxes, ignoring future increases, would equal $337,500 over 25 years, while my homeowners’ association fees would come to $270,000.
Prescription drug costs are another big expense for some seniors, but the costs can be managed with a Medicare Part D prescription drug insurance plan. My monthly Part D premium is $64.80. In addition, annual Part D out-of-pocket costs will be capped at $2,000 starting in 2025. Also, beneficiaries will have the option to pay out-of-pocket costs in monthly amounts over the plan year, instead of in a lump sum when they occur.
For some of us more fortunate retirees, the Medicare premium surcharges known as the income-related monthly adjustment amount (IRMAA) can add significantly to health care costs. This year, couples with taxable income above $206,000 and single seniors with income over $103,000 pay more for Medicare Parts B and D. But only about 7% of Medicare recipients pay income-based premiums.
What about other expenses? The average retiree spends about $1,000 a year for dental care, which is roughly the same as the annual cost of veterinary care for a dog or cat.
Medicare covers vision expenses when they’re related to a medical condition, such as cataracts, dry eye, glaucoma, or vision issues related to diabetes. Other vision care, which is uncovered, is generally manageable and predictable.
My advice: Forget about those big, scary meaningless numbers. Plan realistically for your monthly Medicare and supplemental premiums as you would for any other ongoing, known retirement expense.
What about purchasing dental or vision coverage? It generally isn’t worth the premium. Premiums can be low, but so too are the benefits.
If you’re concerned about paying for potential out-of-pocket spending on prescriptions, dental and vision care, accumulate a pool of money before retirement for that purpose. A tax-advantaged plan, such as a health savings account, is best. But you can also build up such a fund in a bank savings account. Thereafter, consider adding to it each month in retirement.
Over my working life, I accumulated $18,000 in such a fund with my employer. After 14 years of retirement, there’s about $5,000 left. Much of the $13,000 paid out was spent on one tooth.
For retirement planning purposes, I suggest adding up your Medicare Part B and Part D premiums, along with your likely Medigap monthly premium. Then increase that total by 6% annually to account for inflation.
I haven’t mentioned Medicare Advantage. Even though these plans are popular, their use of limited networks, internal deductibles, co-pays and managed care make them difficult to evaluate. Some seniors will find Medicare Advantage plans acceptable, others will not.
Ironically, these plans employ all the strategies to manage costs that Americans complain loudly about when they’re working and have employer-provided health insurance. Importantly, if you later seek to leave Medicare Advantage and return to original Medicare with a Medigap supplemental plan, there’s no guarantee you’ll be accepted for Medigap coverage.
Needless to say, future Congresses can change any of these programs. The curmudgeon in me says stay alert and informed, and hedge your bets with overly adequate retirement income.
Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on X (Twitter) @QuinnsComments and check out his earlier articles.
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Very informative article, Dick. Generated lots of good discussion.
The quoted totals also rarely state whether “average” is the mean or the median. The mean is often distorted by a small number of people who have very high expenses. Some reports appear to arrive at the figures by taking the average for each of several categories and multiplying them by some constant number of years. However, if you have some medical condition early in your retirement which results in high expenses, you probably won’t live for the 25 years that the figures assume.
The same is true for long term care expenses. Most people (especially men) who enter a nursing home die in significantly less than a year.
Hi Dick,
According to the research I have performed over the years your articles are always spot on. You are an invaluable asset to us HD readers.
We have chosen to pay the higher premiums of a plan G supplemental policy as we then can plan for the yearly increase in our premiums, and the governmental deductible. We will not have to worry about any other out of pocket expenses.
My concern is that I have read that the government wants to have all traditional Medicare plans be in Accountable Care Organizations (ACOs) by 2030. Being a retired Physical Therapist I have waited decades to be able to control my own healthcare rather than an HMO. Have you heard what the effect will be on premiums, and if those in traditional Medicare have the option of changing to a Medicare Advantage plan if they continue to move to ACOs? Otherwise it appears to be a government sponsored bait and switch.
Another point I would like to make is if people have significant funds in HSAs they should consider having a portion of it invested (for us it is 2/3). Also If they have the means pay smaller covered costs with other funds (we have a >$200 threshold) to allow the investments. Otherwise we are keeping our HSA money available to cover the expenses other than routine examinations to cover the costs of glasses and dental work.
Just keep in mind that any inherited HSA accounts must be considered as immediate income for the beneficiaries.
Interesting article. We have around $40k in our HSA plan now (I’m 58) and I max out the contributions each year. I’ve been paying medical expenses out-of-pocket, and while most years it’s not much, we did hit the $20k maximum co-payment once a few years back.
I’m not even sure we’ll stay in the US when we retire. Portugal and Costa Rica have been calling my name! The HSA account may end up being inherited by my daughter.
I was wondering if you bought the extra medigap and D premiums, what kind of out of pocket money could you still be liable for? Just the small deductible (and dental$$$$$$ and vision$)? I’m wondering if our HSA could potentially go unused?
You can also reimburse yourself for medical expenses incurred in prior years all the way back to when the HSA account was first established. e.g., before going on Medicare. You’ll need supporting documentation should you ever be audited.
Very little medical cost, essentially the Part B annual deductible. Rx costs could be high depending on your plan and drugs taken, but that will be limited in the future. Dental and vision are highly variable, but generally manageable. Depends on the size of your HSA which could be used over two lifetimes. You can use the HSA to pay Part B and D and MA plan premiums, but NOT Medigap premiums. Then there is the potential for LTC costs from HSA
Great article, as always.
Fund your Roth IRA for LTC expenses
Avoid dental insurance and those plans that offer discounts as you get what you pay for
Dentistry, especially implants, is very very costly
I had an extraction and implant a few years ago. We’re both still working and both have dental insurance covered by our employers, and it still cost me $5K out of pocket AFTER the insurance. But to Dick’s point, those don’t happen everyday, and if you have savings set aside, you can self-fund that.
Your article is very informative and I agree that the scare tactics used by some companies are misleading.
Nevertheless, medical debt accounts about 2/3rd of bankruptcy filings and it appears that an increasing number of older Americans are taking on credit card debt to pay their medical bills. Thus, while you provide solid evidence that medical expenses are exaggerated for the average retiree, I don’t think it is surprising that concerns about medical expenses are a major concern.
Seniors struggle with medical bankruptcies, health insurance woesBy Daniel WorkmanMore than two-thirds of seniors age 65 and over who file for bankruptcy attribute their financial situations to health problems, according to an August 2010 report by University of Michigan Law School professor John Pottow. For 32.6 percent of those older Americans, medical bills were cited as the cause of their bankruptcies.
Medical costs also are pushing older Americans into a vicious cycle of credit card debt.
According to a report by Melissa Jacoby and Mirya Holman in the Yale Journal of Health Policy, Law and Ethics, one-third of bankruptcy filers in poor health had financed their medical expenses with credit card debt.
Equally troubling, according to the University of Michigan study, is that Americans age 65 and over carry 50 percent more credit card debt than younger debtors. Credit card interest and fees push senior citizens into bankruptcy 50 percent more often than lower age brackets.
https://www.netquote.com/health-insurance/health-news/medical-bankruptcies
One of your best articles yet Richard. I saved it for future reference. Thank you for unpacking this. I’m often read this on the Vanguard site about the high cost of health care in retirement and wondered why it was so high. Perhaps Vanguard is just trying to get people to save more for the retirement. Health care costs are an expense that should go into retirement planning, but there’s no need to exaggerate them.
An excellent article. I agree with almost everything you said. My only minor nit is the dental insurance part. While I agree everything you said is generally true about dental plans, it’s important to note it’s a generalization and not true for everyone. Two things to note: First, dental coverage varies greatly by plan so it’s important for a person to be aware of the details of the plans available to them. While dental insurance may often be of little benefit, there will be exceptions. For example, for those retiring from the military or federal service the dental plans offered through OPM are much better than average. For example, a retiree can get a high plan for $45 a month that offers 100% coverage for 3 cleanings a year and 50% benefit for major items with no limit on annual benefit. Second: For people who do need non-routine dental care the costs can add up quick. Even being on a mediocre plan, while of limited direct benefit, may enable the patient to take advantage of cheaper negotiated rates for services rather than paying list price. So it’s important for a retiree to know what’s available to them and decide accordingly. Having some family members who have incurred significant dental expenses over the years, it is a risk that should be mitigated if possible.
Government plans are quite different. Really no comparison to buying an individual plan on the market.
Keep this in mind, what you pay in premiums reflects what the group collects in benefits, the aggregate benefits paid each year will be less than the premiums charged.
So, a person may collect in one year more than premiums paid, but not the next or not equal to premiums paid.
Unless I’m misunderstanding what you wrote, your third paragraph is incorrect and doesn’t flow from the 2nd paragraph. As with virtually all insurance, long term the pool of premiums (and subsequent investment returns) needs to exceed the total benefits paid. However “a person” in that pool may well collect more than the total of their premiums paid. The total pool of insured’s normally won’t, unless the insurance company is taking a loss due to poor cost projections (or poor investments). Hopefully I’ll never collect on my home fire insurance, but in the event of a total loss my benefit will definitely exceed my total premiums paid.
I’m amazed that you have only taken out about 1K a year from your HSA. Do you pay for some of your medical expenses from other sources?
We pay for our limited medical and routine dental from our regular retirement assets, and only use our HSA funds for out of pocket expenses that exceed $200. That way the 2/3 of HSA assets that are in investments can continue to grow.
Actually my plan was to leave as much as possible for my surviving wife to use so our OOP costs came from regular expenses- fortunately they were low. Then my former employer change our benefits so we no longer need it for that purpose. We did use it for an implant which took about $8,000 and we use it for routine dental and vision and a few Rx co-pays.
I had a thought similar to park slope. What’s motivation for reporting the cost the way they do?
Getting attention and the side impact it scares people. Similar to claims SS will be cut in ten years or so. Very unfortunate because many seniors and would seniors are seriously worried about that.
Medical and LTC costs are the hardest to model in my retirement planning portfolio. Even a sophisticated planner like Pralana expects the user to figure all this out (it does calculate IRMAA).
Trying to search using Google ends up in an ad driven hell of Medicare Advantage vendor paid sites.
Are there any good suggestions for a tool or website that clearly explains what costs to expect based on statistical data and costs from medicare.gov?
The “blog” you referenced is on the NewRetirement website which is no doubt seeking to increase its customer base and income by scaring people into purchasing its retirement planning product.
True, but you can find that headline in many news outlets as well.
As a Quicken user, I can confidently say that since I turned 65, 12.5 years ago we have spent $136,503 for all medical expenses for 2 people. This is an average of $10,920 per year, or $910/month. This monthly amount is less than I was paying just for medical insurance prior to age 65, We have standard Medicare plus a Plan G supplement, and Plan D for prescriptions. Our state has community rating for the supplements and this is an advantage as the premium is still less than $200/mo each. We have both had some expensive procedures during this time, but our out-of-pocket cost for these larger events was very low,
What can sometimes drive medical expense much higher is long term care which Medicare does not cover. And, funding this possible future is the area you should focus on in your planning.
At some level of wealth, in the low 7 digit range, one can just pay for these expenses from assets, Those with much lower levels of wealth will probably be covered by Medicaid, It is those folks who perhaps are between the wealthy and the non-wealthy who must perhaps purchase LTC insurance,
I agree with you regarding who needs LTC. There are 2 huge hurdles for those folks to overcome in order to buy the insurance. 1 is cost of the premiums, and 2 is getting through underwriting. My experience was if you have any ailment much more serious than a hangnail, you’re probably gonna flunk the physical.
We bought our LTC policies when we were younger through a group policy at work. Costs were reasonable and no underwriting shenanigans. There are a few good pieces here on HD discussing LTC insurance. Jonathan likely has those linked to the Guide article on Long-term Care.
See this section of the money guide and the section that follows, plus the articles listed at the bottom of the two pages:
https://humbledollar.com/money-guide/long-term-care-insurance/
We must have read the same article about the cost of healthcare for retirees. “Hundreds of thousands” of dollars spent is a much better headline than only “tens of thousands”.
Thanks for another clear, concise and encouraging explanation, Dick. Whenever I can, I choose a high deductible for any kind of insurance. Even though my LTC premium increases annually, my 100-day elimination period keeps it much lower than what I’ve come to understand others pay. And I know that I’m very fortunate to be able to self-insure for 100 days of LTC. Having moved from NYC to not-so-far away PA will likely make it more affordable should the day come.
Whatever Medigap (supplement) insurance company you pick for your Medigap plan check to see how many “closed block of business.” (deadpool) policies the company has.
This is done because the current book of business have people who have become older and therefore have more illnesses meaning more claims. They close that book and raise the rates to cover the increasing losses. Then, they open a new book with younger, healthier folks and charge a lower premium do to lower claims ratios. After a couple of years, rinse and repeat.
In most states you will be unable to change supplement insurance companies without medical underwriting. A few states have a birthday rules that allows you to change Medigap plans without medical underwriting around your birthday.
This is very confusing. For instance Kaiser, EPO Discretionary Group–Large Group Only had “Closed-Issue Authorized” listed 7 times. There were many other entries for Kaiser. I assume there would only be entries for those who have filed? There were 22 pages, 100 listings each.
Is there an easy way to see how many “closed blocks of business” an insurance company has?
There is no easy way to find deadpools.
You can check your state insurance filing ( hard work)
https://www.serff.com/serff_filing_access.htm
Good YouTube on the subject is ( around 14:30 minutes into)
https://www.youtube.com/watch?v=GE4S8XOdFtY
Find a good broker that has a lot of experience and is not concerned about commissions.
It’s important to realize Medigap is not only under federal regulation, but because it is insurance under state insurance regulation and some states approve the premiums.
About those IRMMA premiums. I just did a quick calculation. The retiree with the median income of $47,629 pays 4.4% of income for Medicare, but the retiree with an income of $106,000 and thus IRMAA premiums pays only 2.76% of their income for Medicare. GO FIGURE!
Health care may not even be your biggest expense. I find that the cost of medical care is about equal to the cost of food, and that housing is usually greater than both put together.
So do you have a special food fund, in case you get hungry? No, you budget for your total combined expenses, and that’s you base budget. You have your extra money for whatever may happen, whether it’s a new car, a new tooth, or a new furnace.
This is good information to keep in the back of my pocket.
Dick, I will be 61 in June and have been retired since 01/22.
i utilize the exchange here in Pa and have an EPO gold plan thru Highmark. Our premium for me and my wife is $1700 per month. But the subsidy is $1300 per month..it’s worked very nicely for us and I hope to be able to continue this until 65. Right now I believe if you keep your income under 70k per year you will be entitled to a subsidy.
And we found that in NH where we live if you can manipulate your income sources ie IRA/401K vs taxable brokerage/savings to stay just under 40k your subsidy covers the full cost of a bronze plan. I would recommend this scenario if you have a couple of years worth of maximum out of pocket expenses in an HSA
Thanks for this, Dick, very helpful. We just started my wife on traditional Medicare and chose a high-deductible G gap plan with a $50 premium. With luck, her good health will continue for many more years.
In starting retirement I was glad I could continue HSA saving with a tax break until I start Medicare too, as long as I pick a high-deductible ACA plan when COBRA coverage ends this summer.
Did you compare the COBRA plan with ACA coverage available? Sometimes employer COBRA coverage with its extra premium charge is more expensive than a ACA plan.
Yes indeed, thanks for asking. COBRA was less expensive with lower out-of-pocket costs and better coverage. That company always had great benefits.