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Mark Miller: Remaking Retirement

Retirement Healthcare Costs: Let's Get Real

Many worry about healthcare spending in retirement, but it’s important to break the numbers down and plan accordingly, says contributor Mark Miller.

Note: This is the first of a two-part series.

How much will you need to spend on healthcare in retirement? The projections we often hear about are daunting--and they make for attention-grabbing headlines.

Fidelity Investments, for example, estimates that a 65-year-old couple retiring in 2019 can expect to spend $285,000 on healthcare and medical expenses throughout retirement. The Employee Benefit Research Institute found that a 65-year-old couple might need nearly $400,000 to meet lifetime expenses in a worst-case scenario.

Such numbers may be useful for tracking general trends, but they can be misleading for people trying to plan for retirement. After all, you won’t need anything like these sums all at once. And much of your routine annual healthcare spending can be managed very well--because it can be predicted and covered by Medicare and other insurance.

If you choose original fee-for-service Medicare, a big chunk of your retirement healthcare spending will go to Medicare Part B (outpatient services), and probably Part D (prescription drugs) and Medigap (supplemental coverage). If you join a Medicare Advantage plan, you’ll pay Part B premiums and perhaps extra for drug coverage. Additional amounts will go to Medicare's required deductibles and cost-sharing, and out-of-pocket expenses outside of the program's coverage.

Research by Vanguard and Mercer last year found that a 65-year-old woman using original Medicare and a Medigap policy (Plan F) could expect to spend $5,200 in 2018 for healthcare. For most retirees, this is a manageable figure.

So when considering the cost of healthcare in retirement, it’s more important to think about the outsize risks beyond Medicare’s protections that could upset your retirement plan.

Let’s consider four key risks: healthcare cost inflation; long-term care; prescription drugs; and dental, vision, and hearing. In the second part of this series, we’ll look at strategies for mitigating these risks.

Healthcare Inflation
The cost of healthcare continues to rise more quickly than overall inflation. Healthview Services, which publishes an annual report on retirement healthcare costs, projects that health expenses will rise at an average annual rate of 4.22%, outpacing general inflation and Social Security cost-of-living adjustments.

But put in context, healthcare inflation may not be as large a risk as it appears. In many cases, healthcare inflation will be offset by lower spending for other goods and services. David Blanchett, Morningstar’s head of retirement research, has found that discretionary spending for things like entertainment and travel falls as we age, while healthcare spending may rise.

Long-Term Care
Many retirees assume Medicare will cover long-term care--but in most cases, it does not. Here, we are not talking about medical care, but assistance you might need if you become frail or disabled, doing everyday activities such as eating, bathing, dressing, or using the bathroom.

Planning for long-term care risk is tough because of the emotional issues it raises--and the difficulty in getting a handle on actual risk.

Rand Corp. research concludes that 56% of people ages 57 to 61 will spend at least one night in a nursing home during their lifetimes. People in this age group run a 10% risk of spending three years or more in a nursing home and a 5% chance of spending more than four years in one. The problem, of course: Your risk may be low, but that won't mean much if you wind up in the unfortunate 10%.

Those longer nursing home stays pose major financial risks. The median annual cost of a private nursing home room this year is just over $100,000, according to Genworth’s annual cost of care survey--and the cost is far higher in some states. (Annual median costs of long-term care are rising about 3% a year, according to Genworth; assisted-living facility costs are rising more than 6% a year.)

Prescription Drugs
Medicare Part D insurance covers most routine prescription drug costs. However, there is a small but real risk of financial ruin for retirees who need very expensive specialty drugs.

The Kaiser Family Foundation found that the risk will impact “a relatively small share of enrollees,” but those who do will face serious financial problems.

Unlike most employer-sponsored insurance, Part D does not cap the total amounts that enrollees must pay out of pocket each year. That was a minor problem when the program launched in 2003, but the advent of very expensive specialty drugs has created new math. Kaiser studied expected annual out-of-pocket costs for 30 specialty drugs used to treat four conditions: cancer, hepatitis C, multiple sclerosis, and rheumatoid arthritis. Median out-of-pocket costs ranged from $2,622 for Zepatier (for hepatitis C) to $16,551 for Idhifa (for leukemia).

In 2019, the standard Part D benefit can have a deductible as high as $415, and 25% coinsurance up to an initial coverage limit of $3,820 in total out-of-pocket spending.

The next level of coverage is the so-called coverage gap, or doughnut hole. The gap was closed gradually as part of the Affordable Care Act, and it is entirely closed for brand-name drugs in 2019--but it still features a different cost-sharing arrangement. Here, brand-name drug manufacturers must provide a 70% discount on drug prices, and enrollees bear 25% of cost out of pocket (for generic drugs, the enrollee share is 37%). That coverage continues until the “catastrophic” level, which begins at $5,100 in out-of-pocket spending.

At that point, beneficiaries pay a 5% coinsurance rate, which can really add up for expensive specialty drugs.

Dental, Vision, and Hearing
Traditional Medicare does not cover most dental, vision or hearing care. Original Medicare will pay for dental care only in very limited circumstances--it must be deemed necessary as part of a covered procedure, for example a tooth extraction needed in preparation for radiation treatment. Some Medicare Advantage plans offer some level of coverage for all of these, but check carefully on what is included and network provider requirements before you enroll.

The general absence of dental, vision, and hearing coverage is troubling since all are critical for good preventive healthcare. Many seniors simply pay for dental care out of pocket--the average out-of-pocket expense among Medicare enrollees who needed dental care in 2016 was $607, according to federal data. And expenses can run much higher if you need a crown, bridge, or root canal, for example. (Some of the Medicare for All bills that have been proposed in Congress would close these gaps.)

High-Income Surcharges
Medicare premiums jump significantly for enrollees who have high income.

High-income seniors pay surcharges on premiums for both Part B and Part D. The surcharges are referred to as the Income-Related Monthly Adjustment Amount. They affect individual tax filers with $85,000 or more in annual income, and joint filers with income over $170,000, and scale up from there.

The Social Security Administration determines who pays the IRMAA using recent tax returns. Eligibility is determined on the basis of modified adjusted gross income, which includes adjusted gross income and tax-exempt interest income. There is a two-year lookback--in other words, whether you pay the IRMAA in 2019 is determined by the MAGI reported on your 2017 tax return. (For details on IRMAA brackets see this brief by the Kaiser Family Foundation.)

In most cases, the people who incur these surcharges are still working, since $85,000 is quite a bit of income to be receiving from Social Security, pensions, or investment income in retirement. In that sense, let’s call it a “good problem to have.” But still--the surcharges can be stiff, so it’s good to know about this risk.

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to WealthManagement.com and the AARP magazine. He publishes a weekly newsletter on news and trends in the field at Retirement Revised. The views expressed in this column do not necessarily reflect the views of Morningstar.com.