Planning and paying for healthcare in retirement

Retirement may last 20 to 30 years or more. Over that time, you’re likely to face rising medical costs, prescription drug expenses, dental and vision needs, and potentially long-term care services. Even healthy people can experience unexpected medical events that create substantial financial strain.

The good news is that people who prepare early often have more flexibility and confidence. By understanding Medicare, planning ahead and considering options such as health savings accounts and protected income through an annuity, you can build a more secure plan for managing healthcare costs throughout retirement.

The real cost of healthcare in retirement

Healthcare costs in retirement come from many different sources. While Medicare provides an important foundation for covering costs, many people are surprised to learn about the expenses it doesn’t cover. For example, your out-of-pocket costs will still include:

• Medicare Part B (medical coverage) premiums
• Medicare Advantage or Medigap premiums
• Prescription drug coverage
• Deductibles and copayments
• Dental care
• Vision exams and glasses
• Hearing aids
• Specialist visits
• Physical therapy and rehabilitation
• Long-term care services

These expenses can add up quickly, especially as you age. In addition to the costs that are recurring and predictable, others may be sudden and unexpected. Also consider that while some people remain relatively healthy and have modest expenses, others may face major costs related to chronic disease, mobility limitations or cognitive decline. Because it’s impossible to predict future health needs with certainty, building flexibility into a retirement plan is essential.

Understanding Medicare basics

Medicare is the federally funded health insurance program that’s the foundation of healthcare coverage for most Americans age 65 and older. It has a lot of parts and can be confusing, so the first step is to understand how it works and to know your options, including what’s covered and what isn’t.

There are four primary parts of Medicare. Each part covers different services and has its own costs, deductibles and rules. Parts A and B are the core parts of Medicare.

Part A: Hospital insurance

This generally covers:

• Inpatient hospital care
• Skilled nursing facility care
• Hospice care
• Limited home healthcare services

Many people do not pay a monthly premium for Part A if they paid Medicare taxes during their working years. However, deductibles and coinsurance still apply.

Part B: Medical insurance

This generally covers:

• Doctor visits
• Outpatient care
• Preventive services
• Laboratory testing
• Durable medical equipment
• Many medically necessary services

Unlike Part A, Part B requires a monthly premium. Higher-income people may also pay income-related surcharges.

Remember, while Medicare Parts A and B provide broad healthcare coverage, they don’t pay all healthcare expenses and there is no cap on annual out-of-pocket spending. You still have to pay for deductibles, copays and coinsurance as well as the expenses mentioned earlier—such as vision, dental, hearing and wellness programs—that are not included. You’ll need supplemental insurance coverage to help pay for these costs. You can get this coverage through either Medicare Advantage plans or Medigap supplemental insurance.

Part C: Medicare Advantage plans (optional)

Medicare Advantage plans are private insurance plans that bundle coverage for different parts of Medicare into one plan. They typically include Parts A, B and D (see below) along with added coverage for the costs not included in Medicare Parts A and B. Many Medicare Advantage plans are available with different features and coverage options, depending on your needs. Costs will vary depending on the plan you choose.

Part D: Prescription drug coverage (optional)

Prescription drug coverage is also provided through private insurance plans, each of which determines which drugs it will cover. Part D plans can be purchased separately or included in a Medicare Advantage plan. Costs will vary depending on the plan you choose.

Choosing your coverage option: Original Medicare vs Medicare Advantage

There are two primary ways to put these parts together to get your Medicare coverage. Choosing between Original Medicare and Medicare Advantage is an important healthcare decisions. Consult a professional to assist you in making a decision and for more information.

Original Medicare plus add-ons

This is the piecemeal approach to Medicare. Original Medicare consists of Parts A and B only, so you purchase separate coverage for each of the parts you need:

• Original Medicare for hospital and medical coverage (Parts A and B)
• Prescription drug coverage (Part D)
• Supplemental coverage for expenses not covered by Parts A and B (Medigap)

Medigap plans (supplemental coverage for Original Medicare)

Medigap plans offer coverage that helps you pay for expenses not included in Medicare Parts A and B, including deductibles, coinsurance and important healthcare services like vision, dental, hearing and wellness programs. Coverage is only available to those who do not choose a Medicare Advantage (Part C) plan.

Features of Medigap plans typically include:

• Nationwide network of providers: You can visit any doctor, specialist or hospital nationwide that accepts Original Medicare. There are no localized HMO or PPO network limitations.
• Flexible treatment options with no referrals needed: You don’t need a formal referral from a primary care physician to schedule an appointment with a specialist. That allows you to choose the treatments you prefer from the providers you want.
• Standardized plans: Plans are easy to compare since they’re largely standardized regardless of which private insurance company you get them from.
• More predictable out-of-pocket costs: Plans generally pay most or all of your deductibles, copayments and coinsurance. With some plans your medical costs are largely fixed, protecting you from high copayments that may come with intensive or chronic care.
• Travel coverage: In addition to covering you anywhere in the United States, most Medigap plans also cover emergency care when traveling internationally.

The potential disadvantage is that Medigap plans generally have higher monthly premiums than Medicare Advantage plans, and Part D coverage is not included. Yet as mentioned, there are generally no deductibles, copayments or coinsurance. So consider your health conditions, travel habits, provider preferences and budget. Medigap may be beneficial for individuals who travel frequently, require frequent medical care/specialists or want a more predictable healthcare budget. Be sure to carefully compare coverage details to determine what’s right for you.

Medicare Advantage plans

As mentioned above, this is the bundled approach to Medicare. Part C Medicare Advantage plans are offered by private insurance companies approved by Medicare. They typically bundle hospital and medical coverage (Parts A and B) with prescription drug coverage (Part D) and supplemental coverage for dental, vision, hearing, wellness and other coverage into a single plan.

Features of Medicare Advantage plans typically include:

• Easy to use: All your coverage is handled through one plan.
• Low to no premium: Premiums are often only $0 to $50 per month on top of your Part B premium.
• Out-of-pockets costs vary depending on care needed: You’ll be responsible for copayments and coinsurance up to a maximum annual out-of-pocket limit, which can vary widely depending on the plan.
• Limited provider network: You generally must use a specific network of doctors (e.g., HMO or PPO) and may need prior authorizations for certain treatments or procedures.

A Medicare Advantage plan may be beneficial if you’re healthy and use few medical services, want low premiums and prefer all your coverage bundled into one. When reviewing premiums, however, remember to consider the cost of copayments, coinsurance and other out-of-pocket items for a more complete picture of total costs.

Managing prescription drug costs

Prescription drug expenses can become a major component of retirement healthcare spending, especially for people managing chronic conditions. Medicare Part D insurance plans each have their own formulary, or list of covered medications, along with different pricing structures and pharmacy networks, so it’s important to review coverage and choose your plan carefully.

It’s also important to review your coverage each year because formularies, premiums and covered medications may change annually. If needed, you can switch your plan during the open enrollment period.

You can also help manage prescription drug costs by:

• Using generic medications when appropriate
• Comparing pharmacy pricing
• Considering mail-order pharmacy options

Using health savings accounts for retirement healthcare

If you’re still working and under age 65 (not enrolled in Medicare), health savings accounts (HSAs) can be an especially valuable retirement healthcare planning tool.*

An HSA is available to individuals enrolled in a qualifying high-deductible health plan. It’s a tax-advantaged investment account created specifically for medical expenses. You can contribute to it alongside your retirement plan. HSAs offer a unique “triple tax advantage”:

1. Contributions are tax deductible.
2. Investments grow tax free.
3. Withdrawals for qualified medical expenses are tax free.

While you can pay for current medical expenses with your HSA funds, you can also allow the funds to grow tax free over many years and use them for future medical expenses when you retire. Unlike flexible spending accounts, there is no “use it or lose it” rule. Unused balances roll over from year to year indefinitely.

HSA funds can be used for many qualified healthcare expenses, including:

• Medicare premiums (excluding Medigap premiums)
• Deductibles and copayments
• Prescription drugs
• Dental and vision expenses
• Qualified long-term care insurance premiums

Remember, though, that you can no longer contribute to an HSA once you enroll in Medicare. Planning ahead is important to maximize the account’s long-term benefits.

Planning for long-term care

A big financial risk you may face is the possibility of needing long-term care. Long-term care refers to assistance with activities of daily living such as bathing, dressing, eating or mobility. Care may be provided at home, in assisted living facilities or in nursing homes.

A common misconception is that Medicare fully covers long-term care. Medicare generally only covers limited, short-term skilled nursing or rehabilitation services. Extended custodial care is usually not covered. Long-term care costs can be substantial and may continue for years. As a result, people often consider several strategies for managing this risk.

Some people choose to self-fund potential long-term care expenses through savings and investments. Others purchase long-term care insurance or hybrid insurance products that combine life insurance with long-term care benefits. Each strategy involves tradeoffs related to cost, flexibility and risk. Evaluating these options before retirement can help you avoid difficult financial decisions later in life.

Considering protected income products

A key retirement concern is the possibility of outliving savings while healthcare expenses continue rising. This is where protected income products such as annuities may play a helpful role.

Annuities are insurance products that can provide regular income that’s guaranteed for life starting immediately or at a future date. While annuities are not appropriate for every investor, they can help you create predictable income that may be used to cover recurring expenses—such as healthcare costs—regardless of market conditions that may affect your other investments. For example, you may choose to use annuity income to pay for:

• Medicare premiums
• Supplemental insurance premiums
• Prescription drug expenses
• Routine medical costs

By matching protected income sources with recurring healthcare expenses, you may reduce pressure on investment portfolios during periods of market volatility. Annuities can also complement other guaranteed income sources such as Social Security or pension benefits. Together, these fixed income benefits may help you create a more stable retirement cash flow plan.

However, annuities also have important considerations. Some products involve fees, surrender charges, liquidity restrictions or inflation concerns. You should carefully review product features and understand how an annuity fits within your broader retirement strategy before purchasing one.

Building a healthcare funding plan

Effective healthcare planning requires more than simply estimating costs. It involves creating a coordinated strategy for funding those expenses throughout retirement. Several practical steps can help you prepare.

Estimate future costs early

Healthcare planning should begin years before retirement whenever possible. Estimating future expenses allows you to adjust savings goals and income strategies gradually over time.

Don’t miss the deadline for enrollment

Medicare enrollment for first-timers happens during a seven-month period that begins three months before the month of your 65th birthday and continues for three months after. During this time you can enroll in Part A and Part B along with a Part D drug plan or a Medicare Advantage plan.

Remember, though, that Medicare will not notify you when it’s time to enroll. You must remember to do it yourself. There are some circumstances when Medicare enrollment is automatic, but in most cases it’s your responsibility.

It’s critical not to miss your enrollment period because you could face a hefty lifelong penalty of 10% added on to your monthly premium for every year that you didn’t have creditable coverage but were eligible for Medicare. That applies to Parts A, B and D. You may not face higher charges for a Medicare Advantage plan, but you may have to wait until the next annual enrollment period to get coverage.

If you’re still working, you may be able to sign up during a special enrollment period, but if you miss your initial enrollment period, you can sign up only during the annual general enrollment period.

Medigap has its own separate six-month enrollment period that begins the first day of the month you’re both 65 or older and enrolled in Medicare Part B. During this period insurance companies cannot deny you coverage or charge you higher premiums because of pre-existing conditions. It’s best to sign up for Parts A, B and D and apply for Medigap coverage early (before your 65th birthday) so coverage can begin as soon as you turn 65.

Review Medicare coverage regularly

Healthcare needs change over time. Reviewing Medicare plans annually helps ensure you’re getting appropriate coverage and competitive pricing. This is especially important for Medicare Advantage plans since so many options are available. If you choose Medicare Advantage and want to switch to Medigap, remember that approval is not guaranteed (it’s only guaranteed upon initial Medicare enrollment). You can switch from Medigap to Medicare Advantage, but again, you may not be able to switch back. That’s why your initial enrollment decisions are so crucial. Be sure to understand all the rules and options before making your decision.

Coordinate your income sources

Social Security, pensions, investment accounts, HSAs and annuities should work together as part of a comprehensive retirement income plan.

Work with qualified professionals

Financial advisors, Medicare specialists and estate planning professionals may help you evaluate complex healthcare and retirement decisions.

Give yourself a running start

Healthcare planning is an important component of retirement preparation. While many people focus primarily on investment balances and income needs, healthcare expenses can significantly affect long-term financial security. No one can predict exactly what healthcare expenses they’ll face in retirement. If you plan early, save consistently and build flexible income strategies you’ll be better positioned to manage both expected and unexpected costs. A thoughtful healthcare plan can help protect not only your finances but also your peace of mind throughout retirement.