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Even With Medicare, Seniors Could Need up to $370,000 to Cover Medical Care Costs

By Christy Bieber – Mar 24, 2018 at 6:05PM

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You'll be shocked at how much money you need for healthcare in retirement.

Do you have plans for retirement, like traveling the country or spoiling your grandkids? Whatever your goals are for your golden years, you'll want to make sure you have enough money saved to fund your dreams.

Unfortunately, if you don't plan for one of the biggest expenses you're likely to face as a senior, you could find your nest egg depleted far faster than you ever imagined. That expense is healthcare.

Around a quarter of retirees indicate that healthcare expenses have derailed their retirement plans, while an even larger portion of seniors end up spending more on healthcare than they anticipated. A recent study from the Employee Benefit Research Institute suggests that people spend a lot more on healthcare expenses than they're likely to plan for.

An older man and a medical professional in a white coat discussing something while the medical professional writes on a clipboard.

Image source: Getty Images.

Seniors may need $370,000 to cover healthcare costs

The Employee Benefit Research Institute conducted a study to determine how much seniors would need to pay for healthcare premiums, deductibles, and other health expenses not covered by insurance. The study assumed the hypothetical senior was covered by Medicare and paid premiums for a supplementary Medigap plan. It factored in costs for outpatient prescription drugs, as well as premiums for Medicare Part B, Medicare Part D, and Medigap Plan F. 

Based on a simulation of 100,000 different scenarios with different rates of return and life expectancies, EBRI found that:

  • A man who was 65 in 2017 would require $73,000 to have a 50% chance of having sufficient funds to cover retirement healthcare costs, including median prescription drug expenses.
  • A woman who was 65 in 2017 would need $95,000 to have a 50% chance of being able to pay for healthcare costs if she had median prescription drug expenditures. 
  • A couple who had prescription drug expenses in the 90th percentile during retirement would need to have $368,000 saved in 2017 to have a 90% chance of being able to cover care expenses.

The necessary savings projected for retirees in 2017 is around 5.7% higher than in 2016, when ERBI estimated a senior couple in the 90th percentile for prescription drug use would need $350,000 to have a 90% chance of covering costs.

You need to plan for healthcare in retirement

Unfortunately, far too many people don't consider healthcare costs when making their retirement plans, because there's an erroneous belief that Medicare will cover most of your costs. That's simply not true.

Medicare covers only around 64% of healthcare services for retirees, and seniors end up paying about 12% of expenses out of pocket. Private insurance and other sources of coverage such as Veterans Affairs pick up the rest of the costs. 

And when it comes to prescription drugs, a senior's out-of-pocket costs may be especially high because of a coverage gap, or "donut hole," that exists in Medicare's prescription coverage. When medications fall within the donut hole, seniors end up paying around 25% out of pocket.  

This means if you develop a chronic condition that requires ongoing prescription drug use, you may end up spending thousands of dollars every single year out of your retirement funds just to stay healthy. 

How can you cover healthcare costs?

The best way to save for healthcare as a senior is to invest in a health savings account throughout your career if you're eligible to do so. HSAs are tax-advantaged savings accounts that are available to people who are enrolled in high-deductible health plans. If possible, you should put money into this account, invest it, and leave it alone to grow, rather than taking it out to cover your expenses when you're younger and still working.

Because not everyone can invest in an HSA, and the amounts you can save within it are limited, you should also factor in health expenses when you set your retirement savings goals. To have enough money to support yourself during retirement, including paying for healthcare costs, you'll likely need to save much more than 10% of your income.

Start planning ASAP

The younger you are when you start your retirement saving, the more likely it is that you'll be able to save enough to pay for healthcare in retirement. Of course, if you're approaching retirement, you'll also need to make a plan.

This may include withdrawing less from savings during your early retirement years so you have enough cash to spend when you get older and sicker. Moving to an area with a lower cost of living and finding other ways to cut your expenses in retirement could also allow you to save for essential care so you don't compound the worries caused by illness with a fear of how you'll pay the medical bills.

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