With new limits on Medicare coverage and prescription drug costs, many retirees may assume that their health care costs are largely covered. But the reality is that some retirees may need to put aside hundreds of thousands to pay medical bills.
A recent report from the Employee Benefit Research Institute suggests that some couples may need up to $469,000 for medical costs alone.
Here’s a look at EBRI’s findings, which include a review of Medicare premiums, out-of-pocket spending and drug costs.
New prescription drug limit isn’t enough
The Inflation Reduction Act caps annual out-of-pocket spending for Medicare Part D prescription drugs at $2,000 starting in 2025. It provides security if you rely on expensive medicines. But according to EBRI’s findings, this does not eliminate the need for a larger health care egg.
Paul Fronstein, director of health benefits research at EBRI, explains in a Summary Among the findings:
“Health care costs remain a major financial challenge in retirement, even for those covered by Medicare. While the new Medicare Part D out-of-pocket cap provides significant financial protection, our analysis shows that many retirees will still need significant savings to have a fair chance of covering health care expenses during retirement.”
Medigap enrollees face higher savings goals
If you choose Medigap supplemental insurance, you’ll need to save more than a Medicare Advantage plan.
According to the report, a couple with a Medigap plan and average premiums might need $267,000 for a 50% shot at covering their medical expenses. Want 90% certainty? The goal has been raised to $405,000.
The highest numbers in the analysis apply to couples with expensive drug costs. To have a 90% chance of covering everything, those couples would have to set aside $469,000.
For single people it’s cheaper, but still expensive:
- A 65-year-old with Medigap and average premiums would need $120,000 for a 50% chance of covering expenses, or $212,000 for 90% confidence.
- A 65-year-old woman will typically need more, $146,000 for a 50% chance and $252,000 for a 90% chance.
Medicare Advantage offers lower targets with trade-offs
Reaching your savings goal may be easier by enrolling in a Medicare Advantage plan.
A person with average drug spending and average health care use would need about $61,000 for a 50% chance of covering costs and $106,000 for a 90% chance. For a woman in the same boat, those numbers are $74,000 and $125,000.
Pairs would need $135,000 to reach 50% confidence and $203,000 to reach 90%.
The downside is that these plans often come with restrictive provider networks and may require prior authorization for specific services.
No matter what Medicare coverage you take, it’s important to plan for your out-of-pocket expenses to protect your financial well-being.
Jake Spiegel, senior research associate at EBRI, explains:
“Retirees and workers approaching retirement should not assume that Medicare will completely protect them from potentially higher health care costs. These findings highlight the importance of planning ahead and understanding the trade-offs between coverage options, including differences in premiums, out-of-pocket expenses and access to care.”
The EBRI analysis may actually underestimate the total bill because it does not include the costs of things Medicare does not cover, such as long-term care, dental visits and vision tests. This is a compelling reason to start saving now so that a medical surprise in your 70s doesn’t derail your financial plans.
Be better prepared for Medicare coverage by checking out our reporting in “8 Things Most People Don’t Know About Medicare.”