When you're saving for retirement, it's imperative to consider all costs you're likely to incur in your later years. Unfortunately, just over a quarter of Americans are laboring under a major misconception about Medicare that's preventing them from doing that. The mistake could be a costly one that jeopardizes their financial security.
Millions of Americans are making a huge Medicare mistake
According to Bank of America's 2020 Workplace Benefits Report, only around half of all employees surveyed indicated they are saving money for healthcare expenses in retirement. For those who aren't saving, one of the biggest reasons was an incorrect belief about Medicare. A full 26% indicated Medicare, Medicaid, or Social Security would cover their healthcare expenditures in their later years -- and because they expect their bills to be paid, they believe they don't need to set aside money for care.
The reality is that Social Security doesn't provide any coverage for medical expenses. While it does provide monthly income you can use for anything you'd like, the average monthly benefit of just $1,519 among retired workers isn't going to go very far in paying for care for those who have chronic conditions or serious ailments. And while Medicaid does provide coverage to a limited number of seniors, it's a means-tested benefit -- you have to spend down most of your assets and have very little household income to qualify for it.
Medicare does provide medical insurance coverage for most retirees, but the actual benefits you'll get are far from comprehensive enough to pay for all the care you'll likely require. Medicare has some big coverage gaps, as it excludes coverage for hearing aids, long-term care, and most vision and dental care. There are also monthly premiums seniors are required to pay for Medicare coverage, as well as coinsurance costs that have to be paid out of pocket.
Since Medicare coverage isn't really that comprehensive, most seniors end up spending thousands of dollars out of pocket even when they're covered by it. In fact, the Employee Benefit Research Institute estimated out-of-pocket medical expenses for a senior couple covered by Medicare in 2020 at $325,000 throughout retirement. And that's after Medicare kicks in -- many people end up having to retire before the age of 65, which means they retire before they become Medicare eligible. If that happens to you, you may need to fund private insurance for several years before getting any help from Medicare at all.
The bottom line is, you cannot afford to make the mistake of assuming that Medicare, Medicaid, and Social Security are going to be sufficient to cover all of your medical needs in your later years. It's imperative to have a substantial amount of money set aside for healthcare expenses.
If you have a health savings account, you can invest in that throughout your career to get tax breaks that make it easier to save for your medical services. But if you don't qualify for one, you'll absolutely need to factor in healthcare expenses when you set retirement savings goals. You can increase the amount you're contributing to your current 401(k) or IRA so you have extra cash for care. Or you could open a dedicated account that you contribute to and draw from solely to cover your out-of-pocket medical expenses that Medicare leaves you paying as a retiree.