Retirement | March 1, 2019

4 Ways to Cover Health Care Costs in Retirement

Medicare isn’t a perfect shield against unexpected health care costs in retirement. Indeed, health-related expenses accounted for three of the top five financial shocks cited in a recent survey of retirees.1

“Most people know that Medicare is there for them starting at age 65, but they may not understand as much as they could about the coinsurance, copays, deductibles, premiums, options and rules—and of course what’s not covered at all,” says Rob Williams, vice president of financial planning at the Schwab Center for Financial Research. “Even under the best of circumstances, Medicare won’t cover everything.”

Here are four ways to help ensure you don’t come up short.

Consider Medigap …

This private insurance supplements Medicare Part A, which covers hospitalization, and Medicare Part B, which covers doctor visits (the two parts together are sometimes referred to as Original Medicare). There are currently 10 Medigap plans standardized by the government, though prices vary depending on where you live.

Depending on which option you choose, Medigap can reduce or eliminate copays, coinsurance and deductibles and limit your out-of-pocket costs. It may also provide limited coverage when traveling outside the United States. Once you enroll in Medicare, you have a six-month open-enrollment window during which to buy a Medigap plan without preexisting conditions affecting cost or eligibility.

… or Medicare Advantage

Also known as Medicare Part C, this private insurance replicates the benefits of Original Medicare and is often less expensive but restricts you to certain doctors and hospitals, much like a health maintenance organization (HMO) or preferred provider organization (PPO) does.

If you have Medicare Advantage, you don’t need—and shouldn’t purchase—Medigap. That said, Medicare Advantage may offer benefits that Original Medicare plus Medigap do not, such as basic dental, hearing and vision care, and even fitness benefits. Most Medicare Advantage plans also include drug coverage (under Original Medicare, you must sign up for a stand-alone prescription drug program, known as Medicare Part D).

Budget for out-of-pocket costs

Medicare Part B, Medigap, Medicare Advantage and Part D drug coverage each come with their own costs. And even with drug coverage and basic dental, hearing and vision care, you can still be on the hook for health care costs that aren’t covered by insurance.

Schwab recommends budgeting $450 to $600 per month per person as a starting point to cover premiums and out-of-pocket expenses. However, health care costs—which have escalated exponentially in recent decades (see “Uphill battle,” below)—can vary widely depending on individual circumstances, including your place of residence.

Uphill battle

Health care costs have increased nearly fivefold since 1970—putting many retirees at risk.

Source: Kaiser Family Foundation with data from the Centers for Medicare & Medicaid Services.

Do your homework

Check for more details about what’s covered by Medicare, Medigap and Medicare Advantage. Rob recommends you explore your options closer to retirement—but well before you reach age 65, so there’s still time to plan ahead and, if necessary, boost your retirement savings to guard against any unpleasant surprises.

“Socking away money in a Health Savings Account, if available to you, can be especially effective,” Rob says. That’s because contributions are tax-deductible, earnings are tax-free and withdrawals are also tax-free if used for qualified medical expenses—including Medicare (though not Medigap) premiums and out-of-pocket costs.

1Society of Actuaries 2015 Risks and Process of Retirement Survey, 01/2016.

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