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Medicare Premiums and Prescription Drugs Come at a Shockingly Large Cost to Retirees

By Christy Bieber – Jul 28, 2020 at 7:30AM

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Will you be prepared for the expense when it finally comes time for you to retire?

It's a sad fact of life that many people develop age-related ailments and need more medical care as they get older. Even if you stay healthy, visiting the doctor and taking medications as prescribed may be key reasons for that good health. 

Unfortunately, because your medical care needs may increase as you age, you'll likely find yourself coping with increased healthcare expenses later in life. That can be a big problem if you're on a fixed income -- especially since the amount you could end up paying for medical care throughout your retirement is shockingly large. 

Older man talking with doctor.

Image source: Getty Images.

Medicare's out-of-pocket costs are higher than you think

Employee Benefit Research Institute took a close look at the costs seniors could expect to incur out of pocket to cover their medical care. The numbers are frightening. In 2020:

  • A 65-year-old man would need $73,000 in savings to have a 50% chance of covering Medicare premiums and median prescription drug expenses during retirement. To have a 90% chance of covering these average costs, the same man would need $130,000. 
  • A 65-year-old woman would need $95,000 in savings to have a 50% chance of covering Medicare premiums and median prescription drug costs for the rest of her life. If she wants a 90% chance of being able to pay for these expenses, she'd need $146,000. 

Most people don't want to gamble a 50-50 wager on whether they'll be able to afford their care costs or not. As a result, for pre-retirees, it's better to save more to have a 90% chance of covering median costs. And that's assuming you don't need more prescription drugs than the average senior. If your medication expenses are in the 90th percentile throughout your retirement and you want a 90% chance of having enough to cover costs, your savings rate would need to be much higher. 

Unfortunately, these significant costs come from the fact that Medicare leaves you with a lot of out-of-pocket expenses, including:

  • Premiums for Medicare Part B health insurance, which pays for routine outpatient care.
  • Premiums for Medicare Part D health insurance, which helps cover prescription drug expenses.
  • A Medigap plan -- an optional add-on to Medicare that pays for some things Medicare doesn't.
  • Out-of-pocket spending for outpatient prescription drugs not covered by Medicare Part D. 

Many seniors simply aren't aware of how much these expenses add up to -- especially if they believe the myth that Medicare offers comprehensive coverage on its own without supplementary insurance. 

The sooner you prepare, the better

You're likely going to be in financial trouble if you've already reached retirement -- or are close to it -- and don't have more than $100,000 set aside just for medical care. But the good news is that all hope isn't lost.

If you find yourself in this situation, research Medigap and Medicare Advantage plans carefully, as it may make sense to pay higher premiums for more comprehensive coverage. That way, you'll know more upfront about what care will cost. Then, rework your budget to ensure you can cover your medical needs and save some extra cash in case those needs increase in the future.

Of course, if you're still a long time away from retirement, you can better prepare for the possibility of substantial medical expenses in your later years. If you have a high deductible health insurance plan and are eligible to contribute to a health savings account (HSA), it's the best tool to save for care because of the substantial tax advantages it provides. But even if you can't put money into an HSA, simply factoring healthcare costs in mind when setting retirement goals can make all the difference.

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