Most Americans underestimate their health care costs in retirement, and that’s a problem because those future bills can turn out to be significantly higher than you expect.
According to new research by the Employee Benefits Research Institute (EBRI), a non-profit, non-partisan organization. Because of the longer life expectancy, a 65-year-old woman will need $197,000.
And those may be low estimates, experts say, underscoring the need for workers to either focus on ways to reduce those overall costs or use any means to save enough.
“Medicare does not cover all health care costs,” Paul Fronstin, director of health benefits research at EBRI, told Yahoo Finance. “As a result, many Medicare beneficiaries purchase Medigap or enroll in Medicare Advantage plans to help offset out-of-pocket health care costs. They also enroll in Part D prescription drug plans. The combination of premiums for additional coverage and out-of-pocket costs can put a huge strain on the finances of Medicare beneficiaries.
For seniors registered in Medicare Advantage plans, savings targets are typically lower, according to the report. A 65-year-old man enrolled in Medicare Advantage who has average drug costs and average use of health care services would need to save $96,000 to have a 9 in 10 chance of meeting medical bills in retirement . Meanwhile, a 65-year-old woman will need $113,000.
The EBRI report also affects a provision of Inflation Reduction Law that caps annual Medicare Part D prescription drug out-of-pocket costs starting in 2025 so that no enrollee will pay more than $2,000 out-of-pocket per year.
This cap will affect 50 million Americans with Medicare Part D and could protect enrollees from rising costs. According to ANALYSIS by the Kaiser Family Foundation (KFF), a non-profit organization.
‘Fiercely conservative’
Importantly, this EBRI analysis does not weigh the potential costs of long-term care expenses and other bills not covered by Medicare, such as dental and vision care. These are often overlooked when planning for retirement.
“Planning the cost of health care is one of the most difficult jobs,” Mary Johnson, policy analyst for the senior league, said Yahoo Finance. “Not only do retirees need to save enough to replace around 70% of pre-retirement income – just to live on – but we need to carefully plan for much larger amounts once we get older and need more care other than health care. such as paying helpers to help with activities of daily living, cooking, cleaning or maintaining a home.”
“We’re not inclined to think that way,” Johnson said.
It also doesn’t take into account the fact that many people retire before they qualify for Medicare at age 65 and typically pay their health insurance plan costs out of pocket for several years of retirement. In EBRI 2022 Pension Confidence Survey of 2,677 adults that included 1,132 retirees, over one in 4 (29%) expect to be 70 or older or not at all, yet the media reported the retirement age as 62.
“These EBRI projections are extremely conservative,” Melinda Caughill, co-founder of the Medicare advice website. 65 Incorporated, told Yahoo Finance. “Unfortunately, this is only the tip of the iceberg. We are crazy in this country because there is an expectation for people that health care in retirement is free and should be free. But it isn’t, and it won’t be. I wish there was a money tree for health care, but there isn’t.”
“I don’t move for sunlight or palm trees”
Conservative or not, these findings should be a warning to Americans who still have retirement years to consider contributing to a health savings account (HSA) However, to qualify, you must be enrolled in a high-deductible health care plan.
For 2023, the annual inflation-adjusted limit on HSA contributions for single coverage under a high-deductible health plan will be $3,850, up from $3,650 in 2022. The HSA contribution limit for family coverage will be $7,750, down from $7,300.
Your HSA contribution with your employer can be made through an automatic payroll deduction, where the funds are directed from your paycheck, tax-free, into an HSA. You can also add funds directly to your HSA at any time. While these contributions are not tax-free, they are deductible on your tax return. Some employers match contributions to HSAs similar to employer-provided retirement savings accounts. You can also open an account as a self-employed freelancer or business owner.
“From a tax perspective, an HSA is the best thing out there,” Fronstin previously told Yahoo Finance. “It benefits from a triple tax advantage. It is the only account that allows one to put money into a tax-free basis, set up tax-free and leave tax-free for qualified health care expenses.”
Another way to lower your future health care cost needs is by working longer. If workers who receive health benefits — and a salary — from their employer choose to work after age 65 and delay enrolling in Medicare Parts B and D, they would have to have less than the EBRI researchers’ savings estimates— of, according to the report.
According to Bureau of Labor Statistics.
Finally, here’s another significant cost reduction for retirees looking to relocate for their next chapter. Health care costs “vary wildly based on where you live,” Caughill said.
In 2022, according to Missouri Center for Economic Research and Information cost of living data SERIEShealth care costs in Maryland, for example, were lower than in Florida or Arizona.
“What’s $100,000 in Arkansas could be $200,000 in Illinois or Wisconsin,” Caughill said. “Retirees should move not for sunshine or palm trees, but for health care costs.”
Kerry is a reporter and senior columnist at Yahoo Finance. Follow him on Twitter @kerryhannon.
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