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Preparing for Your Medical Expenses in Retirement

Preparing for Medical Expenses in Retirement

Your health care costs can still add up even after you enroll in Medicare, but smart strategies can help you minimize these expenses.

seniors with canesBecoming a smart health care shopper can help you save on medical expenses.

You may think that you don’t need to worry about health care costs after you turn 65 and are eligible for Medicare. But you still have to pay some premiums and out-of-pocket expenses, and the numbers can add up over time: A recent study by Fidelity found that a 65-year-old couple retiring in 2020 will pay an average of $295,000 in health care costs over their lifetime, a 3.5% increase over the 2019 figures. That number includes Medicare premiums, deductibles, and copayments, or coverage to fill in the gaps.

The following steps can help you prepare for these expenses in retirement and minimize your health care costs:


  • Understand the costs and make strategic moves to fill in the gaps.
  • Build up tax-free savings in a health savings account.
  • Make the most of Medicare open enrollment each year.
  • Contest the Medicare high-income surcharge when you retire.
  • Take advantage of other ways to manage your health care costs.
  • Have a plan for long-term care expenses.

Understand the Costs and Make Strategic Moves to Fill in the Gaps


Those massive numbers are less intimidating when you break them down into monthly costs and prepare for these expenses in advance.

Cut costs and expensesMedicare premiums account for 40% of the expenses in the Fidelity study. Even though Medicare Part A (which covers hospitalization) is free for most people, Part B (which covers physician services and outpatient care) costs $144.60 per month – or more for high earners. Medicare doesn’t cover prescription drugs, but you can buy Part D prescription-drug coverage to help with those expenses – the average Part D policy costs about $32 in 2020. You may still have some out-of-pocket costs for prescription drugs even with Part D, which accounts for 20% of the total in the Fidelity study.

And the last 40% of the expenses in the Fidelity study come from Medicare copayments and deductibles. Medicare Part A has a $1,408 deductible in 2020, and you may also have daily copayments for long-term hospital stays – a $352 daily copayment for days 61 to 90, and a $704 copayment for up to 60 lifetime reserve days after that. Medicare Part B has a $198 deductible in 2020, and then you generally have to pay 20% of the cost of doctor services, outpatient costs, and durable medical equipment. Most people buy a Medicare supplement policy (Medigap) to cover these deductibles, copayments, and other costs, such as foreign travel. The average Medigap policy cost $152 per month in 2019, according to eHealth Medicare, and the price can vary a lot depending on your state, the insurer and the type of plan you choose.

“If you can afford to pay the Medigap premiums, it’s a nice way not to get stuck with big out-of-pocket costs,” says Hope Manion, senior vice president and chief health and welfare actuary for Fidelity. “It’s a good way to manage your risk, and you know what you’re paying every month.” You have little or no out-of-pocket costs if you get a Medigap policy, and you can use any doctor or facility that accepts Medicare. You can buy any Medigap policy in your area within six months of signing up for Part B, but insurers in many states can reject you or charge more based on your health if you search for a policy (or want to switch policies) after that deadline.

Another option: Instead of getting Medigap and a Part D policy, you could get medical and drug coverage from private insurer through a Medicare Advantage plan. The premiums are usually lower than they are for Medigap and Part D – the average is about $36 per month, and some plans charge $0 premiums. “That can reduce the numbers quite a bit, depending on where you are,” says Manion. But you usually have to use a limited network of providers and hospitals, and you may have more out-of-pocket costs throughout the year. “If a person chooses a Medicare Advantage plan, have a rainy day fund that at least matches the maximum out-of-pocket threshold,” says Joanne Giardini-Russell, owner of Giardini Medicare in Howell, Michigan, which helps people with Medicare issues and supplemental coverage. “If you have a bad health year or two, realize that you can hit those levels.” Medicare Advantage plans can have maximum out-of-pocket spending limits as high as $6,700 for in-network services in 2020, but some plans have lower caps.


Build Up Tax-Free Savings in a Health Savings Account

Health Savings AccountYou can’t contribute to a health savings account after you enroll in Medicare, but you can use the money you’ve built up in the account tax-free for even more expenses after you turn 65. In addition to out-of-pocket health care costs, you can also use HSA money tax-free to pay premiums for Medicare Part B, Part D, and Medicare Advantage plans (but not for Medigap). And you can withdraw money tax-free from the HSA to pay for other eligible medical expenses that aren’t covered by Medicare, such as dental and vision expenses, hearing aids, and over-the-counter medications.

To contribute to an HSA in 2020, you must have an HSA-eligible health insurance policy with a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage. You can contribute up to $3,550 if you have self-only coverage in 2020, or $7,100 if you have family coverage, plus $1,000 if you’re 55 or older. Your contributions are tax-deductible (or pretax if through your employer), and you can use the money for eligible expenses at any time.

“The HSA is a great vehicle because of the triple tax advantage,” says Manion. “Put away as much as you can.” Your employer may contribute to the account, too. You must stop contributing when you enroll in Medicare.


Make the Most of Medicare Open Enrollment Each Year

MedicareYou have from Oct. 15 to Dec. 7 to choose a Part D or Medicare Advantage plan for the next calendar year. Even though many people keep their coverage on autopilot, it’s important to check out your options every year. New plans enter and leave the market, or they may boost premiums and change the copayments for your medications. Medicare Advantage plans can also change costs, coverage and provider networks – the doctors and hospitals you use may not be included in the plan the next year. And if your health needs have changed or you’ve been prescribed new medications, it’s particularly important to compare your options because a different plan may be better for you now.

“Many people do not look at their Part D plans annually to determine if the one they had in 2020 will work well for them in 2021,” says Giardini-Russell. “In September the plans will send out the plan materials telling a customer what has changed for the following year,” she says. “Most people don’t read this. Then when they get a refill in January they could be surprised.” She recommends comparing plans using the Medicare Plan Finder or working with a good agent. You can also get help from your State Health Insurance Assistance Program, or SHIP.

When comparing Part D plans, look at overall costs for your medications. “Don’t make your decision based only on the premiums,” says Bonnie Burns, a consultant with California Health Advocates. If you have high copayments for your medications, a plan with low premiums could end up costing you more by the end of the year. For example, Burns has prescribed a medication that cost more than $300 under her plan, so she’s going to re-shop plans during open enrollment in the fall.

Contest the Medicare High-Income Surcharge When You Retire


Bookeeping Most people pay $144.60 per month for Medicare Part B in 2020, but high earners pay more. If you’re single and your adjusted gross income plus tax-exempt interest income is more than $87,000, or more than $174,000 and you’re married filing jointly, then you may have to pay from $202.40 to $491.60 each month. The higher your income, the higher the premiums.

This high-income surcharge is based on your last tax return on file – so your 2021 premiums will be based on your 2019 income. If your income has dropped since then because of certain life-changing events – including job loss or retirement, divorce, marriage or the death of your spouse – you may be able to get the surcharge reduced or eliminated based on your more-recent income.

To request the change, wait until you get the notice of your Medicare Income-Related Monthly Adjustment Amount, or IRMAA, then file Form SSA-44 with the date of the life-changing event and a copy of your more-recent tax return (or an estimate of your annual income). You also need to provide evidence of the life-changing event, such as a letter from your employer stating that you retired.


Take Advantage of Other Ways to Manage Your Health Care Costs

Save on prescription drugs by asking your doctor if you can switch to a generic or a therapeutic alternative that covers the same need but costs less under your plan. Also, most Part D plans have preferred pharmacies, where you’ll pay much lower copayments than at other pharmacies. It also helps to use tools such as that provide coupons and discount programs if you pay cash. “They are not insurance, but you can purchase medications using the program,” says Giardini-Russell. “It could make sense financially even though you do have Part D in place.”

Become a smart health care shopper, even if you’re only paying a portion of the cost. “Take ownership of your care,” says Tim Steffen, advisor education senior consultant with PIMCO. “Ask your doctor about treatment options rather than just taking the first recommendation. Put plenty of focus on preventive care, rather than just reactive care.”


Have a Plan for Long-Term Care Expenses

The Fidelity study doesn’t include a potentially large health care expense in retirement: the cost of long-term care. The median cost of a private room in a nursing home was more than $102,000 in 2019, and the cost of an assisted-living facility or 44 hours per week of home care was about $50,000, according to the Genworth Cost of Care study. Some people don’t end up needing any long-term care at all, but others need care for several years – especially if they have a long-lasting condition like Alzheimer’s disease.

Long care expensesMedicare rarely covers any of these expenses, and Medicaid only kicks in after you spend almost all of your money (and limits where you can receive care). Consider the potential cost of long-term care in your retirement plans. “Most people will require some level of care at some point in life, so be sure to talk to your financial planner about how you’d handle that situation and where the dollars for that care will come from,” says Giardini-Russell.

You may want to buy long-term-care insurance to help cover some of these costs. “Insurance is there for the expenses you can’t afford to meet on your own,” says Steffen. “If you have the resources, maybe you can self-insure for those kinds of things, but if you don’t you need to plan ahead. Long-term care insurance is one option.”

Long-term care insurance has become more expensive over the past several years, so you may want to cover part of the cost of care from your savings and income, and get insurance to fill in the gap (you can find the average cost of different types of care in your area at Most people who buy long-term care insurance are in their 50s or 60s. If you have a health savings account, you can withdraw money tax-free to pay a portion of eligible long-term care insurance premiums based on your age – up to $430 in 2020 if you’re 40 or younger, $810 if you’re 41 to 50, up to $1,630 if you’re 51 to 60, up to $4,350 if you’re 61 to 70, and up to $5,430 if you’re older than 70. Those limits are per person; your spouse can take tax-free withdrawals based on his or her age, too.

Another option is a hybrid policy that provides long-term-care coverage or pays a death benefit to your heirs if you don’t end up needing care. These policies have become more popular over the past few years because either you or your heirs will receive some benefits. But they tend to have higher upfront costs – you usually pay a lump sum or pay premiums over a fixed time period (such as 10 years).


Cut Costs in Retirement

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Real estate pro Brian Chandler of RE/MAX Alliance Group is a top producer and sales trainer located in the Parker, Colorado, area. Whether you’re buying or selling, team up with Brian today! 720.808.1007 What is it like Living In Parker Colorado? Read more articles like these Top Realtor Info Contact Brian Chandler

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