Medicare is an important government program because it helps seniors cover medical costs in their later years. But the operative word is helps.
Unfortunately, many future retirees are overly optimistic about exactly how much assistance Medicare will provide. By planning to rely totally on Medicare, millions of Americans could be making a dangerous mistake and leave them with a major financial shortfall during retirement.
By overestimating Medicare coverage, you could lose your financial security
Recent research from the Insured Retirement Institute revealed a troubling problem with the way many Americans view Medicare. According to IRI's survey, 4 in 10 respondents believe Medicare will provide complete coverage for all their healthcare needs.
Why is this such a big problem? The issue is that Medicare won't come close to doing that. In fact, not only do retirees have to pay Medicare premiums, a deductible, and coinsurance costs for many services, but there are many types of healthcare that Medicare doesn't cover. This includes dental and hearing.
Since seniors often need more care than their younger counterparts -- and since Medicare coinsurance costs can actually be higher than many types of employer-sponsored health insurance -- the out-of-pocket spending that retirees may face can be substantial. If this comes as a big surprise to retirees who have been anticipating that Medicare will cover all their needs, this could lead to a huge financial crisis.
Based on recent AARP estimates, the average retiree could end up spending about 30% of their Social Security checks on healthcare alone. Data from Fidelity also revealed that a typical 65-year-old heterosexual senior couple retiring in 2021 could face out-of-pocket expenditures of around $300,000 for healthcare during retirement.
If you're losing a huge chunk of Social Security benefits to expenses you thought would be paid for by Medicare, you may struggle to pay for the basics beyond your doctor bills. And if you incur $300,000 in costs that you hadn't planned on, you could drain your nest egg very quickly, leaving you with no money to supplement Social Security.
How to prepare for medical costs
To avoid ending up in dire financial straits because healthcare costs catch you by surprise, it's best to research early on how Medicare works, what it doesn't cover, and the likely out-of-pocket costs.
Factor in healthcare expenditures when deciding how much should be saved for your later years, and consider investing in a health savings account (HSA) if you're eligible. If you can't put money into an HSA, beefing up 401(k) contributions or creating a dedicated IRA where you save money earmarked for medical costs could be smart options.
The important thing is that you aren't caught unprepared, as the 40% of Americans who expect Medicare to cover everything will be. Once you know the truth about how much financial help is available during retirement, you can plan accordingly.