A Woman’s Guide to Understanding Healthcare Costs in Retirement
It’s not surprising that a survey last year by T. Rowe Price found that healthcare costs are the biggest financial worry among retirees, especially for women who may be going through retirement on their own.
On the surface, the numbers for women are very unsettling. According to a 2022 analysis by the Employee Benefit Research Institute, to have a 90 percent chance of meeting their healthcare spending needs in retirement, a woman will need to have saved $197,000 as compared to a man who will only need to have saved $166,000.
A 65-year-old woman enrolled in a Medigap plan with average premiums will need to have saved $116,000 to have a 50 percent chance of having enough to cover premiums and median prescription drug expenditures. Compared to a man who would need to have saved $96,000.
If you are married, couples enrolled in a Medigap plan with average premiums will need to have saved $212,000 to have a 50 percent chance of covering their medical expenditures in retirement and $318,000 to have a 90 percent chance.
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Fidelity confirmed the findings by the Employee Benefit Research Institute.
On average, according to the 2024 Fidelity Retiree Health Care Cost Estimate, a 65-year-old individual may need $165,000 in after-tax savings to cover health care expenses. A 5% increase from 2023.
While such numbers sound daunting, it’s not as simple as the headline suggests.
Let’s dig a little deeper.
According to Fidelity, Medicare Part B (doctors) and Part D (prescription) premiums will account for about 43% of the dollars you spend on health care in retirement.
In other words, almost half of your annual healthcare expenses are planned expenses. They are budgeted and paid from monthly income.
When we share this with clients, we find that it eases some of their financial trepidations.
Of the remaining 57%, 47% will flow into co-payments, co-insurance, and other deductibles used to pay your doctor and for hospital visits. The remaining 10% will be spent on prescription drugs.
Be that as it may, we want to stress that healthcare costs tend to rise in retirement. As we get older, our use of health care typically rises.
Understanding Medicare
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If you are a woman approaching retirement, here are the basics.
Did you know that there is a penalty if you miss Medicare’s Initial Enrollment Period (IEP)? And it's not just a one-time penalty. It’s for the rest of your life, and it's tacked on to your monthly premium.
Let’s explain.
Your IEP is a seven-month window—three months prior and three months after your 65th birthday. Miss the window for Medicare Part B, and your monthly Part B premiums could go up 10% for every 12-month period you go without coverage.
There's also a 1% penalty per month for each month you delay enrolling in Part D prescription drug coverage.
Now that we’ve explained the penalty, what is Medicare Part B?
Part B helps cover:
- Services from doctors and other healthcare providers
- Outpatient care
- Home health care
- Durable medical equipment
- Many preventive services
But what if you are 65 and insured by your employer?
That’s great! You'll have the opportunity to enroll in Medicare penalty-free when you leave your employer through a Special Enrollment Period.
Starting this year, your chance to join lasts for two months after the month your coverage ends.
We’ve touched on Part B, so let’s review Part A. Part A helps cover inpatient care in hospitals, skilled nursing facility care, hospice care, and home health care.
It’s free for most folks as you or a spouse (or ex-spouse if the marriage lasted at least ten years) paid Medicare taxes long enough while working—generally at least ten years.
Medicare doesn't generally cover long-term care in a nursing home.
Your liability:
- Days 1-20: $0.
- Days 21-100: $204 each day.
- Days 101 and beyond: You pay all costs.
Medicare Part A may provide coverage for skilled nursing facility care that’s medically necessary.
Medicare Part C, or Medicare Advantage, provides for Part A, Part B, and most include Part D. Medicare Advantage Plans may offer extra coverage, such as vision, hearing, dental, and/or health and wellness programs.
It is like a PPO or HMO, so check that your doctors are a part of your network before you purchase a Part C plan. If you use in-network facilities, you will have a maximum out-of-pocket of $8,850 for approved in-network services this year.
Traditional Medicare does not have an out-of-pocket limit for covered services, and a Medigap policy is needed to limit your out-of-pocket liability.
Retiring Before Age 65
One of the primary roadblocks to early retirement is paying for healthcare costs and, more specifically, health insurance premiums prior to becoming eligible for Medicare at age 65 (or prior to 65 if you have been disabled for at least two years).
Very few women have access to employer-sponsored pre-65 retiree medical coverage. This means to retire before 65, you’ll need to find coverage until you are eligible for Medicare.
Here are the potential options that may be available:
COBRA
COBRA is a federal law that allows employees and their families to continue their employer-sponsored health insurance coverage for a limited time after losing coverage due to certain life events, such as job loss (or retirement), reduction in work hours, divorce, or other qualifying events.
Advantages:
Allows you to maintain existing health insurance coverage following certain qualifying life events, including death and divorce. COBRA may also provide time to make different arrangements or consider other options without worrying about losing coverage during the transition period.
Disadvantages:
COBRA lasts a maximum of 18 to 36 months, depending on the qualifying event. Eventually, will need to find alternative coverage. Whether that be new employment, turning 65, or other insurance options (See below). You will also most likely be required to pay the full premium for their health insurance, plus an administrative fee of up to 2%.
Public Marketplace (sometimes referred to as Obamacare)
Public marketplace health coverage refers to the health insurance plans offered through the Health Insurance Marketplace, also known as the Exchange, which was established under the Affordable Care Act (ACA) in 2010. These marketplaces are online platforms operated either by the federal government or individual states, where individuals, families, and small businesses can shop for and purchase health insurance.
Advantages:
Marketplace coverage often comes with financial assistance in the form of subsidies, such as premium tax credits and cost-sharing reductions, which help lower the cost of premiums and out-of-pocket expenses for eligible individuals and families based on income. All plans must cover essential health benefits, such as preventive care, hospitalization, prescription drugs, maternity care, and mental health services.
Disadvantages:
While subsidies may help lower premiums, some marketplace plans, particularly those in the lower tiers (like Bronze), can have high deductibles and out-of-pocket expenses. There may be more limited provider networks, and navigating the public marketplace can be confusing, with numerous plan options, varying levels of coverage, and complex subsidy qualifications. We recommend working with an insurance professional with experience navigating Public Marketplace health options.
Private Insurance
Private health insurance is a type of health coverage offered by private companies rather than government-run programs. Individuals or employers purchase these plans to cover medical expenses, such as doctor visits, hospital stays, prescription medications, and preventive care. It operates independently of government programs like Medicare or Medicaid.
Advantages:
Private health insurance plans often offer more extensive provider networks and allow greater flexibility in choosing doctors, specialists, and hospitals. Individuals may have access to a wider range of healthcare providers, including out-of-network options, which can be beneficial for those who prefer specific doctors or hospitals.
Disadvantages:
Can be expensive, especially for comprehensive plans that offer lower deductibles and broader coverage. While private health insurance providers cannot deny coverage due to pre-existing conditions under the Affordable Care Act, premiums can still be significantly higher for older individuals or those who require frequent medical care.
As with Marketplace coverage, navigating private health insurance policies' terms, conditions, and the fine print can be complicated. Again, we recommend working with an experienced insurance professional.
Paying for Healthcare—Be Proactive
1. Consider various retirement accounts, such as IRAs and Roth IRAs. For 2024, a contribution of up to $7,000 can be made to an IRA or Roth IRA if you have employment or self-employment income. If you are not employed but are currently married, you may be able to make a spousal IRA or Roth IRA contribution if the employed spouse has sufficient income. The IRA and Roth IRA catch-up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 to include an annual cost-of-living adjustment. It remains $1,000 for 2024, according to the IRS. This means you could potentially contribute up to $8,000 to an IRA or Roth IRA. Which should you contribute to? Talk to your financial advisor or tax advisor about which may be best for you.
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans is $7,500 for 2024. Therefore, participants in 401(k), 403(b), and most 457 plans who are 50 and older can contribute up to $30,500 starting in 2024.
Take advantage of the catch-up provisions.
2. If you are enrolled in a high-deductible health plan and it offers a health savings account (HSA), you have an excellent vehicle to accumulate and save for eligible health-related expenses. These accounts are not subject to income tax, and you may use them for eligible health-related expenses. Perhaps the most important feature of an HSA is that funds roll over year after year if unused rather than “use it or lose it.”
3. Should I buy long-term care insurance? Medicare Part A (Hospital Insurance) may cover care in a certified skilled nursing facility. But it must be medically necessary for you to have skilled care. Medicare doesn’t cover custodial care (such as nursing homes) if that’s the only care you need.
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Medicare.gov defines custodial care as activities of daily living (like bathing, dressing, using the bathroom, and eating) or personal needs that could be done safely and reasonably without professional skills or training.
One option that may help absorb long-term care costs, such as assisted living or a nursing home, is a long-term care policy. But it won’t come cheap.
Long-term care insurance policies reimburse policyholders a daily amount (up to a pre-selected limit) for services to assist them with activities of daily living. You can select a range of care options.
According to LongTermCare.gov, the cost of a policy is based on:
- How old you are when you buy the policy
- The maximum amount that a policy will pay per day and
- The maximum number of days a policy will pay.
The maximum amount per day times the number of days determines the lifetime maximum you will receive.
You may not qualify for long-term care insurance if you are in poor health.
Before you purchase a policy, please be aware that the insurance company may raise the premium on your policy. Therefore, we encourage you to contact your insurance professional for additional information and request data on the company's premium rate history.
Conclusion
At Blake Wealth Management, we specialize in helping women navigate the complexities of retirement planning. Our goal is to empower women with the knowledge they need to make confident financial decisions, especially when it comes to managing healthcare costs in retirement. By understanding Medicare, long-term care insurance, and strategic financial planning, you can protect your financial future while enjoying a secure, fulfilling retirement.
For more personalized advice, feel free to reach out, and we’ll help tailor a plan that aligns with your specific needs.
This is not an exhaustive list of considerations. Neither RFG Advisory nor Blake Wealth Management provide tax, legal or accounting advice. The information herein is general in nature and should not be considered legal or tax advice. Please consult an attorney or tax professional regarding your specific situation.