How Does Healthcare Work in Retirement?

Understanding your healthcare options and planning ahead can save you the stress of finding quality healthcare when you retire.

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Understanding your healthcare options and planning ahead can save you the stress of finding quality healthcare when you retire.

One of the most overwhelming facets of retirement is how to navigate your health insurance options. Besides housing and transportation costs, there’s so much to think about that you probably might not realize that your healthcare benefit plan in retirement is far different from the healthcare benefit plan you had while working. And because many Americans, especially those nearing retirement are worried about the costs of healthcare in retirement, it’s important to highlight how healthcare in retirement works.

You will be eligible for Medicare once you hit the age of 65. Generally, Medicare will take care of a huge chunk of your medical expenses, but not all. You’ll, therefore, have to pay some amount for some of your healthcare coverage. This means that you may require your own savings to cover the remaining medical costs that Medicare doesn’t.

Without the basic knowledge of how healthcare in retirement works, it can seem so daunting. In this great piece, we’ll go through how healthcare works in retirement while highlighting everything that you need to know.

Table of Contents

How Much is Health Care Going to Cost in Retirement?

According to recent statistics from Fidelity, a 65-year-old couple retiring in 2020 will have to spend an average of $295,000 in health care costs over their lifetime and these figures are likely to increase. These numbers can be scary and intimidating but you shouldn’t give up just yet. To be honest with you, these figures are estimated over the course of 30 years and that’s why they look scary.  

The good news is that there are strategies that can help you prepare and get educated for potential health-care expenses in your retirement. The first step is to have a rough idea of what your health care in retirement might cost.

With that in mind, the most important thing is to run some numbers and get an estimated sense of what your budget in retirement might look like. You can start out by using the cost calculators such as the AARP one, which is among the easiest ones to use. This can help you know exactly what you’re dealing with and help you in planning accordingly.

Of course, it’s important to start by considering your personal situation. The idea here is that healthcare in retirement isn’t set in stone and may differ from one person to another. As such, let’s look at some of the factors that might affect health care costs for retirees.

Factors that Might Affect Health Care Costs for Retirees

The cost of your health care in retirement may depend on certain factors. Fortunately, you have control over some of them!

Your Health Status

It’s true that your health or your family’s health history may affect your health care cost in retirement. So if your health is worse, you shouldn’t be surprised to pay more in your retirement. Here are a few things to consider:

  • Are you a smoker?
  • Do you have two or more chronic health conditions?
  • Do you visit the doctor frequently, say at least ten times a year?

If you have any of this, you should plan to spend a bigger portion of your retirement income on health care. On the contrary, you can spend less than average if you’ve never smoked, do not have any chronic condition, and don’t go to the doctor that often.

Your Location

While traditional Medicare coverage is the same everywhere, Medicare Advantage (Part C) and prescription coverage (Part D), as well as supplemental plans (Medigap), may vary depending on your location. In other words, the cost of healthcare in retirement may vary from one location to the other.

For example, a supplemental plan in the highest-cost area is $3,348 while the same may only cost you $1,488 in the lowest-cost area.

Your Retirement Age

Retiring early (that is before the age of 65) may always sound like a superb idea. Unfortunately, you won’t be eligible for Medicare until you attain the age of 65. But even if you retire before the age of 65, you can consider some of these options:

Stay on your former employer’s plan – You can use COBRA (Consolidated Omnibus Budget Reconciliation Act) benefits to bridge the gap but only if you’re planning to retire within 18 months before you become eligible for Medicare.

This is essentially the same coverage you had while working only that your employer will no longer subsidize it, so your costs may increase slightly. Again, some employers choose to offer coverage even after you retire as part of your retirement coverage.

Use your spouse’s plan – You can use your spouse’s employer coverage if he/she is still working and has employer-sponsored coverage. Keep in mind that this is probably the cheapest way to get healthcare in retirement.

Buy insurance via a professional association or on the open market – Every state has an open market exchange where you can buy health care coverage from private insurers. You can also get group insurance coverage if you’re a member of an association such as AARP. This can be an expensive alternative, especially if you do not qualify for tax credits.

The Type of Plan that You Choose

Here are a few things to consider about your health care coverage in retirement.

  • You have to decide between Traditional Medicare and Medicare Advantage when it is time to enroll in Medicare. You might have to add Medigap coverage if you choose traditional Medicare. You may also have to choose if you want a prescription drug.
  • You have to keep in mind that Medicare doesn’t cover long-term care so you have to consider how to cover long-term care.
  • You may have to buy separate coverage if your Medicare option doesn’t cover dental and vision costs.

Your Income

If you’re still working after enrolling in Medicare or have saved remarkably well for retirement, you may have to pay more in premiums since you won’t have access to much government subsidies. In short, you may not be eligible for government subsidies if you earn a yearly income of about $85,000 for an individual or $170,000 for a married couple.

You can also pay an extra charge of $4,800 per year if your income is extremely high.

The Amount that the Employer Subsidizes

If your employer has been covering a huge chunk of your health care costs, the loss of such benefits will mean that your health care costs might be much higher in your retirement. You are likely to lose more than $5,000 a year in health care benefits when you retire.

So How Will You Pay for Health Care During Retirement?

For many Americans, there are generally three ways of funding health care costs in retirement:

  • Using Medicare
  • Staying on an employer’s medical plan, and
  • Buying private health insurance

Using Medicare

Medicare is essentially a federal health program created to supplement healthcare costs for the elderly in the United States. You can only be eligible when you attain the age of 65, must be a U.S. citizen, or must have been a permanent legal resident in the country for at least five years. You or your spouse should have also paid Social Security taxes for at least ten years.

While Medicare can pay a huge chunk of your health care costs when you’re eligible, it doesn’t cover everything. Medicare has its own sets of rules, costs, and here’s how it works.

Medicare Part A – As part of the Original Medicare (which covers Part A and Part B), Medicare Part A covers you when you are hospitalized. You may not have to pay a monthly premium to access these benefits but you’ll have to pay deductibles, which is $1,484 for 2021.

Medicare Part B – This covers the visit to the doctor, medical equipment, and a variety of tests. It has a monthly premium of $148.5 for 2021, but this can be waived if you already receive Social Security or any form of Civil Service benefit such as Railroad Retirement benefits.

Medicare Part C – Also known as Medicare Advantage, this is technically a separate health plan offered via private insurers who are Medicare-approved. This plan typically covers the same costs covered in the Original Medicare (Part A and Part B) in addition to Part D, which covers prescription drugs.

You have to keep in mind that each plan has its own costs and benefits, which can vary from one private insurer to the other. It’s, therefore, essential to shop around and find a plan that works best for your situation and retirement budget.

Part D – As we noted earlier, this covers prescription drugs and the premium depends largely on your income and what you can afford.

To this point, it’s important to note that Medicare doesn’t cover all medical costs in retirement. For example, it doesn’t cover routine dental care, cosmetic surgery, dentures, long-term care, acupuncture, hearing aids, and so on.

Again, you have to keep in mind that there are rules and penalties that apply to Medicare enrollment. There’s a seven-month enrollment period when you are first eligible by attaining the age of 65. You may have to pay a penalty for late enrollment. You can also change your health care plan during the open enrollment period.

Using an Employer’s Plan

If you’ve attained the age of 65 but still working, you may still choose to explore Medicare to avoid late enrollment penalties, which may be costly. However, you must have a good understanding of how your employer’s medical coverage can work in tandem with Medicare.

Here are a few details to keep in mind:

  •  If you’re planning to work past 65, you can consider delaying enrolling in Medicare to avoid a late penalty. You can then enroll in Medicare later when you officially retire using the Special Enrollment Period.
  • You should also understand how your employer’s coverage works with Medicare. For example, your employer’s medical coverage may require you to sign up for Medicare Part A while helping you avoid Part B, C, and/or D provided that you remain on the employer’s medical coverage plan.
  • You should also consider the prices you pay and whether it makes sense to fully remain on your employer’s coverage or to shift to Medicare, or even to explore the less expensive Medigap and use it to supplement your employer’s medical coverage.

You can as well keep the employer-sponsored plan temporary through COBRA. This is a program that typically allows you to keep your employer’s health coverage for up to 18 months after you retire or lose your job. You should, however, keep in mind that you’ll be required to pay the entire premium as well as the 2% administrative costs.

That being said, you can trigger COBRA within 30 days of leaving the company by contacting the health plan. You have to make sure that the plan is worth the price. Remember, these plans do change frequently, so it’s important to pay close attention to the details and stay on top of things.

Private Health Insurance

As a retiree, you can choose to sign up for a health insurance plan through the federal health insurance marketplace, which is available in every state. This is enabled by the Affordable Care Act (ACA) but make sure that you shop for the best plan based on your conditions and budget.

You can also buy health insurance directly from a private insurer outside the federal or state health insurance marketplace.

Looking Beyond Retirement Savings to Pay for Healthcare in Retirement

It’s always advisable not to put off your savings no matter your age, especially if you want to access better healthcare and live a more comfortable life in retirement. So while you’ve been saving in traditional retirement vehicles such as workplace retirement plans, it’s important to explore other options. Again, the healthcare costs shouldn’t drain your nest egg in retirement.

As such, you can avoid this in two ways:

  • Health Savings Account and
  • Long-term Care Insurance

Health Savings Account

You can save money for retirement healthcare costs in a health savings account (HSA) if you’ve not enrolled in Medicare. HSA is generally a good fit as it offers triple tax benefits including:

  • Tax-deferred growth
  • Deductible contributions, and
  • Tax-free withdrawals for qualified medical expenses

That’s not all; participating in such high-deductible health plans (HDHPs) can be beneficial in saving you money on healthcare premiums, especially when compared to other healthcare plans. Having an HSA also means that the money is always yours and doesn’t get affected when you leave or get a new job. In other words, you can simply take it with you.

More importantly, HSA can help manage both your short-term and long-term healthcare needs. This is because it gives you the flexibility of managing both your current medical expenses while letting the balance grow tax-free to help you cover future medical costs.

The regular HSA contribution limit in 2021 is $7,200 for family coverage and $3,600 for individual coverage. These limits apply for both employer and employee contributions but you’ll no longer make contributions to HSA once you enroll in Medicare.

Long-term Care Insurance

As we noted earlier, Medicare doesn’t cover long-term health insurance. But when you purchase long-term health insurance you can pay a premium based on the amount of time that you’d like to be covered in the future, say for two years, five years, or for the rest of your life.

Keep in mind that long-term health insurance might not be available to most people, especially after retiring. It’s, therefore, important to plan ahead and have long-term health insurance in the form of a life insurance policy when you’re still young.

To this end, it’s easy to see that healthcare costs can account for a big portion of your retirement budget. And whether you are under or over 65, it’s important to understand how healthcare works in retirement and plan ahead. You should also evaluate and review your healthcare plan during the open enrollment period and see if it’s possible to get much better coverage at a cheaper price.

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