Where Medicare Falls Short
Get wise about maintaining your health – and wealth – in retirement. Medicare provides a lot of coverage, but it doesn’t cover everything.
It’s never too early to start thinking and planning for retirement, especially when it comes to the top three expenses: housing, transportation and healthcare. You may have a clear vision of your ideal retirement, but that dream could fade if unexpected healthcare costs start to eat away at your hard-earned retirement savings. The fact is, even with Medicare, quality healthcare can come with a hefty price tag. There are still premiums, copayments, deductibles and other out-of-pocket expenses that must be accounted for.
Finding the Gaps
Estimating your future medical costs and planning for them will require becoming familiar with what Medicare will and won’t cover, and the various costs involved. So what can you expect to pay out of pocket should you need one or more of these common services? Take a look.
Hearing and Vision
Hearing aids can range from $900 to more than $6,000 each, depending on the technology. More advanced ones sport Bluetooth capability that streams sound from your cellphone, for example, making it easier to hear a phone conversation. They also need to be replaced every five years or so and require care, maintenance and, of course, batteries. Medicare covers hearing tests when medically necessary (think vertigo or injury), but otherwise you’re on your own. A typical hearing test can cost up to $250 without insurance; it’s about the same cost for a hearing aid fitting or consultation, too.
Routine dental care, including dentures, is not covered by Medicare or supplemental health insurance. The American Dental Association estimated that two exams and cleanings and a set of X-rays cost about $288, on average. It is estimated that an average retired couple will spend $18,590 out of pocket for dental services without additional insurance. That doesn’t mean you should forgo visiting the dentist to avoid these costs. Sound absurd? It happens. One recent study by the Centers for Disease Control and Prevention found that almost half of Americans over age 65 had not visited the dentist in the past year and that 20% of older adults have untreated cavities and are losing teeth.
Far too many retirees struggle with finding a sense of purpose when they transition into retirement. Creating a new identity and life for yourself may be difficult, and that could manifest as depression, anxiety or stress. Unfortunately, Medicare may not provide enough support. Part B allows for an annual health screening and therapy should you receive an official diagnosis. However, Medicare covers 80% of the cost after you meet your deductible. You’ll be responsible for the other 20%, which can range from $50 to $250 an hour with an approved provider.
Like to travel overseas? You might be under-covered. Traditional Medicare generally does not provide coverage for hospital or medical costs outside the United States. Residents of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and the Northern Mariana Islands are covered, and in some cases, inpatient hospital services in Canada or Mexico may also be covered. If your wanderlust takes you further abroad, consider short-term travel insurance or a Medigap policy that covers foreign emergencies, such as plans C through J. Just be aware that the coverage applies for a limited time and doesn’t cover all expenses. A deductible and lifetime maximum apply.
Here’s the real doozy. Medicare, for the most part, doesn’t cover long-term or custodial care for help with everyday tasks like dressing or bathing. However, some 70% of us will need some form of long-term care either in a specialized facility or at home. To put that in perspective, nursing home care averaged $87,600 a year in 2016, according to the U.S. Department of Health and Human Services. A home health aide can cost more than $240 a day. Long-term care insurance can help you manage this risk by covering a range of nursing, social and rehabilitative services for people who need ongoing assistance due to a chronic illness or disability. Talk to your advisor about when it makes sense to invest in a policy, what coverage you might need for skilled, intermediate and custodial care, and whether it makes sense to pay your LTC premiums from a health savings account (HSA). Of course, supplemental insurance might help in many cases, but even that comes at a cost, and the premiums are subject to inflation over time.
Covering Your Bases
So now that we’ve got an understanding of where we may be exposed when it comes to healthcare, how can we cover our bases? Budgeting becomes crucial to laying the groundwork to pay for those necessary expenses. Ideally, we want to maintain or improve our quality of life in retirement, and that means having ready access to excellent healthcare and preferred providers.
The good news is you’ll have several options. A broad approach may be allocating a lump sum of money to cover the average lifetime healthcare costs; however not everyone is able to set aside hundreds of thousands of dollars, even if done over time, in a cash reserve to fund future healthcare needs. Even if you are able to do so, it may take away from your general retirement savings, leaving you with a smaller pool of assets to fund the lifestyle you’ve worked so hard for.
A more practical approach may be to estimate your and your spouse’s projected health needs based on your family history and state of health. For example, if you are healthier, your healthcare costs may be lower than average. You and your advisor can start with a baseline for a person your age and estimate up or down from there depending on how conservative you wish to be. Keep in mind, the longer you expect to live, the higher your costs could be, so you may want to use the more aggressive numbers in your calculations. That way the money will be there should you need it – say in the event that you develop a chronic condition – and turn into a nice financial cushion if you don’t.
Still others take a hybrid approach, estimating their costs, buying enough insurance to cover most of their anticipated needs and then setting aside a smaller cash reserve for the unexpected.
Other options include taking advantage of health savings accounts (HSAs) while you can. HSAs are associated with high-deductible health insurance plans, and the money saved within them can be used for many of the costs outlined above as well as other qualifying health expenses. Distributions taken to cover qualified medical expenses are also tax-exempt. The catch here is you can no longer contribute once you’re enrolled in Medicare, even if you’re still working. However, you can use any HSA funds you already have and roll over unused amounts, so keep that in mind in the months before you enroll.
You may also want to consider how life insurance could play a role. Most permanent life insurance policies allow partial withdrawals or loans for healthcare expenses. The caveat here is that any unpaid loan amounts will reduce the future benefit to your heirs.
If you’re still working, you may be covered by an employer-sponsored plan, but you’ll need to determine how your benefits work with Medicare and what your spouse may be entitled to. And some previous employers extend insurance benefits to retirees.
To Your Health
As you look forward to retirement, remember that health and access to healthcare are key components to your quality of life. It pays to understand what you can and cannot expect from Medicare, so that you and your loved ones are prepared and so that unexpected medical expenses don’t eat into your retirement savings. Rely on your advisor to help clarify issues, add in contingency plans to your retirement income strategy and point you toward resources that will help.
Sources: Centers for Medicare & Medicaid Services; medicare.gov; aarp.com; time.com/money; kiplinger.com; "How Much Does Therapy or Counseling Cost?" Depression RSS2, March 29, 2016; costhelper.com