Smaller Than It Looks

Richard Quinn

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:

  • Community rated. Premiums are the same for all people who have the same type of policy.
  • Issue-age rated. The younger you are, the lower your premium is. Premiums don’t increase because of age.
  • Attained-age rated. Your premium increases every year as you age.

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 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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