Calculating healthcare costs in retirement
When we are confronted with the topic of health care costs (particularly those faced by retirees), numbers are often bandied about that seem not only vague, but oftentimes misleading.
Unfortunately, this is due to a serious lack of understanding amongst the American populace of the true extent of health care costs, and how greatly these costs will impact their lives and savings.
For example, a recent article by Michael Essany of Digital Journal titled, “Seniors struggling with health care costs, retirement planning,” highlighted this very issue. Mr. Essany reported that according to the Employee Benefit Research Institute, “out-of-pocket health care costs clocked in at $4,760 in 2011 for a 65-year-old in poor health, and $4,450 for a 65-year-old in good health.”
The issue at hand is the fact that this number does not reflect the other costs associated with health care in retirement, which just happen to be the costs associated with Medicare. And for many, the number is not small.
If we were to take a closer look at Medicare costs faced by retirees in 2011, the number reported by EBRI may not only be off, but off by a large amount. In 2011 the average retiree faced a Medicare Part B expense of $115.40 per month (or $1,384.80 per year), plus premiums for Medicare Part D which averaged close to $600 a year before the annual deductible of $310.
Furthermore, if a retiree wanted to participate in a MediGap Plan to “fill in the gaps” of Medicare Parts A & B, they then had to pay another $2,124 for a Plan F policy.
The costs of a retiree’s Medicare premiums alone for 2011 amounted to $4,108 on average before any deductibles from Part D, or any other costs associated to health care. Thankfully, these costs have remained fairly static since 2011, as Medicare Part B premiums decreased to $104.90 a month and Part D premiums and MediGap Plan premiums inflated at about 3%.
The problem still remains, however, as EBRI along with other financial firms that are trying to tackle these costs have neglected to point out that Medicare is not, unfortunately, free and that costs associated with it are very much real for all retirees.
According to the Medicare Board of Trustees, this tragically misunderstood issue is expected to become an even larger problem, as costs associated with Medicare are projected to inflate by at least 5% to 7%, or even higher going forward. By 2021 Medicare Part B is projected to cost a retiree about $1,940 per year, while Part D is expected to run close to $950 per year for the average healthy retiree. A Plan F MediGap Plan will come in at about $2,658 per year.
That equates to $5548 per person annually in 2021, a mere 6 years from now. The average couple retiring in 2014 should expect to see the costs of their premiums alone total close to $300,000 for a 20 year retirement.
And this is before any other “out of pocket health costs” are even factored in. Now, think about those other “out of pocket health costs” retirees are facing that EBRI has reported. How much more will be tacked on to the $300,000 bill?
Health care costs are the new concern, and they should be. For far too long, people who have otherwise been diligently planning for retirement have neglected to consider the impact of these costs in any of their financial projections.