For retirement, we often think about what we need to set aside for rent, utilities, travel and other lifestyle needs. We often don’t think about how much we need to set aside for healthcare because there is this common misconception that our healthcare is completely covered under Medicare.
This could not be further from the truth. In fact, Medicare is by no means free and does not cover all medical expenses. Medicare only covers 80 percent, leaving you responsible for the remaining 20 percent. This could be detrimental to your retirement savings depending on the type of medical care you need. Misunderstanding Medicare and your financial responsibility for healthcare may be the biggest mistake retirees make.
What you need to know about Original Medicare
The most important thing to know about Medicare is that it is not free and doesn’t cover 100 percent of medical expenses. As a reminder, Original Medicare covers 80 percent, you’ll cover 20 percent.
Original Medicare comes in two parts: Part A and Part B. Medicare Part A is often called your hospital benefits. Most Americans won’t pay any monthly premiums for these benefits because they have already been paid for through payroll taxes. Ten years of paying FICA taxes is what allows your Part A monthly premiums to be free.
However, Medicare Part B has monthly premiums everyone must pay. In 2019, the average American pays $135.50/month for Part B benefits. Medicare Part B covers your outpatient benefits. This is everything from doctor’s visits, durable medical equipment, x-rays, preventative care, therapy services, etc. There is an annual deductible of $185 that must be met before Part B pays its 80 percent of expenses.
Medicare Supplement Insurance Plans
Another big mistake many Americans make when it comes to medical expenses in retirement is underestimating how much 20 percent can actually be. For some, 20 percent isn’t that much – depending on your health needs. However, a heart attack or cancer diagnosis can be extremely expensive for Medicare patients. This is where a Medicare Supplement plan comes in handy.
What is a Medicare Supplement plan? A Medicare Supplement plan (also referred to as Medigap) covers the gaps in coverage that Original Medicare doesn’t cover. It pays some or all of your out-of-pocket costs under Part A and Part B. It’s additional insurance you purchase to make budgeting for health care a little easier.
Health Savings Accounts
A health savings account is one of the best ways to save for health care costs in retirement. These are tax-advantaged accounts where you can set aside money for medical expenses down the road. You can invest your pre-tax contributions in a stock fund or money market account to take advantage of compounding returns to grow your health care nest egg over time.
The maximum amount an individual can contribute each year is $3,500, and the maximum for a family is $7,000 a year. You can even contribute an extra $1,000 a year once you reach age 55.
In order to open a health savings account, you must have a high deductible health insurance plan. Another important thing to note is that once you enroll in Medicare you can no longer make contributions to your health savings account. If you continue to make contributions to this account after enrolling in Medicare, there will be penalties from the IRS.
In conclusion, the biggest retirement mistake you could be making is underestimating your health care costs. Don’t rely on Medicare to cover your costs. According to Fidelity Investments, the average couple retiring at age 65 in 2019 will need approximately $285,000 to cover medical costs. If you need help putting a plan in place to cover your health spending in retirement, consult a financial professional.