Don’t be surprised by healthcare costs in retirement

Retirement isn’t cheap. Even though you’re no longer drawing a paycheck, you still must pay for housing, food, utilities, transportation and healthcare, to name just a few expenses. As prices continue to escalate, it’s not surprising that the ages at which people expect to retire – and when they actually do – have crept up in recent years.
Speaking of healthcare costs, here’s a number that’ll stop you in your tracks: According to an annual Fidelity Investments study of retirement costs, the average couple retiring in 2014 at age 65 is expected to need $220,000 (in today’s dollars) to cover their medical expenses in retirement. Those planning to retire at 62 can expect another $17,000 in additional annual expenses.
Fidelity’s estimate includes Medicare premiums, deductibles, copayments and other out-of-pocket costs, but notably does not include most dental or vision services, over-the-counter medications or, most importantly, long-term care.
When Fidelity polled pre-retirees aged 55 to 64, 48 percent believed they’d only need $50,000 to cover their healthcare costs in retirement. That’s quite a reality gap.
If you’re planning to retire in the next few years and are concerned you haven’t saved enough money to cover your healthcare expenses, here’s a sampling of what you can expect to pay:
Medicare Part A helps cover inpatient hospital, skilled nursing facility and hospice services, as well as home health care. Most people pay no monthly premium for Part A. However, in 2014 there’s a $1,216 deductible for each time you’re admitted as an inpatient, plus a $306 daily coinsurance after 60 days ($608/day after 90 days).
Medicare Part B pays toward medically necessary doctor’s services, outpatient care, durable medical equipment and many preventive services. It’s optional and has a $104.90 monthly premium (although higher-income people pay more). There’s a $147 yearly deductible, after which you’re responsible for 20 percent of Medicare-approved service amounts, provided the doctor/provider accepts Medicare. Note: There’s no annual limit for out-of-pocket expenses.
Medicare Part C (Advantage) plans are offered by private insurers as alternatives to Parts A and B. They’re usually structured like HMO or PPO plans. Most cover prescription drugs (so Part D is unnecessary) and some also provide dental and vision coverage. You must use the plan’s doctor, hospital and pharmacy provider networks, which are more restrictive than under Parts A and B.
Advantage plan costs vary considerably, based on factors such as annual out-of-pocket maximums, monthly premiums, copayments and covered medications. Some Advantage plans cost no more than Part B, while others have a higher premium (to account for drug and other additional coverage).
Medicare Part D helps cover the cost of prescription drugs. It’s optional and carries a monthly premium. These privately run plans vary widely in terms of cost, copayments and deductibles and medications covered. The 2014 national average monthly premium is about $32, although plans can cost up to $175 a month. Plus, higher-income people pay an additional surcharge. You may not find a plan that covers all your medications, but aim for one that at least covers the most expensive drugs.
Use the Medicare Plan Finder at to compare Part D and Advantage plans in your area. To learn more about how Medicare works and what it does and doesn’t cover, read “Medicare & You 2014” at the same website.
Bottom line: Even though Medicare does pay a significant portion of retiree medical care, make sure that when you’re budgeting for retirement you take into account the many out-of-pocket expenses you’re likely to encounter.

Jason Alderman, who wrote this article, directs Visa’s financial education programs.