For most retirees, the largest expense in retirement will either be taxes or healthcare. In a 2021 survey, 32% of all workers reported they were either “not too” or “not at all” confident that they would have enough money to pay for their medical expenses in retirement.1
Regardless of your confidence, however, being aware of potential healthcare costs during retirement will help you understand how much you should budget for healthcare in your retirement income planning.
The first step in being aware of potential healthcare costs is understanding the different types of expenses. Here, we’ll explain the three main categories of healthcare costs in retirement.
The first cost in healthcare to consider is your Medicare Part B premium. According to Medicare.gov, your premium amount depends on your adjusted gross income (AGI) as reported on your IRS tax return.2 Most people pay the standard premium amount of $170.10/month, but the premium can go up to $578.30/month depending on your AGI.
In addition to your premium, you’ll also have to consider the Part B deductible which, in 2022, was $233. After you meet your deductible for the year, you will likely pay 20% of most doctor services, outpatient therapies, and some durable medical equipment (walkers, wheelchairs, canes, etc.).
The next healthcare costs in retirement that you should consider are any co-payments related to Medicare-covered services that are not paid by Medicare Supplement Insurance plans (aka Medigap) or other health insurance.
These copays can relate to specialist visits, prescription costs, and other healthcare needs that aren’t completely paid for by your insurance. Drug costs can vary by pharmacy, supplier costs, whether there is a generic option, and more.
Speaking of prescription drug costs, once you and your spouse spend a combined $4,430 (including deductible) on drugs in 2022, you’ll pay no more than 25% of the cost of prescription drugs until your out-of-pocket spending is $7,050.3
Expenses Not Covered by Medicare
There are several healthcare expenses that may not be covered by Medicare, and this is where your healthcare costs in retirement have the potential to skyrocket.
One example of a service that may not be covered under Medicare is long-term care. This includes medical and non-medical care for people who are unable to care for themselves. Medicare and most health insurance plans don’t pay for long-term care.
In addition to long-term care, Medicare may not cover expenses related to4:
- Most dental care
- Eye exams related to prescribing glasses
- Cosmetic surgery
- Hearing aids and exams for fitting them
- Routine foot care
While Medicare is a great option for many healthcare expenses for retirees, some people also choose to purchase a Medicare supplement, also known as Medigap, to cover some of the above rather than paying out of pocket. Medigap plans are health plans offered by a private company that contract with Medicare to provide health benefits.5 They may cover expenses that the regular Medicare plan doesn’t.
One example of a Medicare health plan is a Medicare Advantage Plan. Medicare Advantage Plans are offered by Medicare-approved private companies and may offer a higher level of coverage depending on your needs.6 Sometimes, Medicare Advantage Plans are called Medicare Part C.
The costs associated with a Medicare Advantage Plan will vary depending on the health insurance company you purchase your policy from. You can also choose between a Health Maintenance Organization (HMO) plan and a Preferred Provider Organization (PPO) plan. You must have Medicare Part A and Part B coverage to apply for a Medicare Advantage Plan.
What You Should Know About Long-term Care
The odds of needing long-term care are high. Someone turning 65 today has almost a 70% chance of needing some type of long-term care services and support in their remaining years.7
For most, Medicare will be the primary source of coverage for day to day healthcare costs, but what if you need more than that? As a retiree, the future may present more of a concern than it once did--you may wonder what you'll do if your health deteriorates. If you must enter a nursing home, for example, how will you pay for it? There are several options for paying these costs, but the key is planning well in advance. Waiting until you actually need the care is often too late.
Options for paying for a nursing home or any other form of long-term care might include the use of investment assets or equity from your home. Another option is long-term care insurance (LTCI). Government-regulated programs like Medicare can also help, but probably won’t be enough. Frequently, it’s some combination of multiple strategies that is the most effective.
If you lack sufficient resources to pay for long-term care on your own, should you buy LTCI, rely only on government programs, or use an LTCI policy to supplement government benefits? Before you can answer this question, you'll need to know what types of long-term care are covered under each program. Figuring out where one program leaves off and another begins can be a challenge, so here's an overview.
The Three Types of Long-term Care
There are basically three types of long-term care: skilled care, intermediate care, and custodial care.8 You need to understand how these types of care are defined, and the extent to which you can obtain coverage for each of them.
What is Skilled Care?
Skilled care is continuous round-the-clock care required to treat a medical condition. It is ordered by a doctor and usually delivered by a skilled medical worker (e.g., a registered nurse or professional therapist). A treatment plan is established and supervised by a doctor.8
Medicare's Coverage of Skilled Care
Medicare is a federal health insurance program for people age 65 and older and certain others. It provides 100 percent coverage for the first 20 days in each benefit period (year) that you're in a skilled care facility--as long as certain conditions are met:
- Before moving into a skilled care facility, you must have spent at least 3 consecutive days in the hospital for the same condition
- This hospital stay must be within 30 days of the time you enter the skilled care facility, and
- Skilled care must be provided in a certified facility
You are required to pay a daily co-payment for the 21st through 100th day in a skilled care facility, but Medicare covers any expenses beyond this amount. Medicare provides no coverage for expenses incurred after the 100th day.
Medigap's Coverage of Skilled care
Most Medigap plans cover your daily Medicare co-payment for the 21st to 100th day of skilled care.
Long-term Care Insurance's (LTCI's) Coverage of Skilled Care
LTCI pays a selected dollar amount per day for a specified period for certain forms of care in nursing homes and other settings. You'll need LTCI if you want coverage beyond the 100th day of care in a skilled care facility. Because many people who enter such facilities stay for several years, LTCI can provide valuable financial protection.
What is Intermediate Care?
Intermediate care is care needed on only an occasional basis (daily or a few times a week), and is less specialized than skilled care. Intermediate care may include intermittent nursing and rehabilitative care provided by registered nurses, licensed practical nurses, and nurse’s aides under the supervision of a physician.8
Medicare and Intermediate Care
Medicare may cover certain types of intermediate care, but only under specific conditions. For example, it covers skilled nursing care, physical therapy, and speech therapy services provided in your home, but only if you are confined to your home and a doctor orders the services. Intermediate care in a nursing home is typically not covered by Medicare.
Medigap and Intermediate Care
Most Medigap policies provide an additional amount per at-home visit for intermediate care, but only if a doctor orders the services as a follow-up to an injury or illness. Intermediate care received in a nursing home is typically not covered by Medigap.
LTCI and Intermediate Care
Most LTCI policies provide coverage for intermediate care services provided in the home or in a facility. (Home health care and care in a facility can be purchased separately or together.) If you have the coverage for either home or facility care, LTCI will cover all three levels of care. In addition, many LTCI policies cover care received in continuing care retirement communities, assisted-living centers, and adult day-care centers.
What is Custodial Care?
Custodial care is provided to assist in performing the activities of daily living (e.g., bathing, eating, and dressing). It does not require a doctor's orders and can be performed by someone without professional medical skills. This type of care can be provided at home or in a facility.8
Medicare and Medigap Don't Cover Custodial Care
Medicare provides no coverage for custodial care because these services are generally nonmedical in nature. Medigap also provides no coverage for custodial care.
LTCI Can Cover Custodial Care
If you are concerned about coverage for custodial care, an LTCI policy may be appropriate. Along with coverage for personal care, many policies may also include coverage for light housekeeping, meal preparation, and laundry services, among other things. If you have the coverage for either home or facility care, it will cover all three levels of care. When you're shopping for an LTCI policy, keep in mind that most long-term care is custodial in nature.
The bottom line is there are many healthcare costs in retirement, from routine checkups to unexpected medical expenses. Building the cost of healthcare into your retirement income plan is an extremely important part of achieving a successful retirement.
Neither RFG Advisory nor its Investment Advisor Representatives nor Private Client Services nor its Registered Representatives provide Medicare advice. This material has been prepared for informational purposes only and is not intended to provide individual Medicare advice. Please consult your own insurance professional for guidance on such matters.
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