As everyone knows, overall healthcare costs are rising every year. But tell that to older Americans. Fidelity’s annual survey of estimated health care costs in retirement surprisingly remained unchanged of the last year.
This means that a retiree who leaves the workforce this year is likely to shell out the same amount of money on health care in retirement as someone who retired in 2022. The after-tax cost of medical bills during the Retirement for a single 65-year-old retiree held steady at $157,500 ($315,000 for the average retiree couple at the same age), according to the new 2023 Retiree Health Care Cost Estimate, which tracks retiree health care costs each year .
“This is the first time in nearly 10 years that we’ve seen the estimate stay the same,” Hope Manion, senior vice president and chief actuary at Fidelity, told Yahoo Finance. The reason: “The impact of recent Medicare coverage policy changes on our estimate,” she said.
While the survey is certainly good news, few retirees have budgeted for this type of outlay, and finding ways to deal with it is non-negotiable. Even young Americans would do well to hone and plan now for what will likely be one of their biggest living costs as they exit the workforce. Bottom line? There are things that can be done now to meet future costs later in life.
When Medicare kicks in at age 65, it’s far from a free ride. What keeps costs in check are mainly the big changes in Medicare brought about by the Inflation Reduction Act signed last year.
For example: The benefit for 3.3 million Medicare Part D beneficiaries with diabetes who are now capped at $35 for a monthly supply of insulin. Starting July 1, beneficiaries whose insulin is covered by Part B will also be covered by the cap. Another notable change this year: Vaccines, like the expensive med shingles, covered under Part D, won’t have copays or deductibles.
Most of the provisions for Medicare’s 59 million beneficiaries, including lower prescription drug prices and out-of-pocket expenses, won’t go into effect for another few years, but they are factored into this year’s estimate.
Beginning in 2025, annual Medicare Part D prescription drug expenses will be capped so that no enrollee is required to pay more than $2,000 out of pocket annually. That cap will impact 50 million Americans and directly help the 1.4 million Medicare patients who spend more than $2,000 on drugs each year. That includes people who need high-cost cancer drugs, according to an analysis by the Kaiser Family Foundation (KFF).
In fact, Fidelity’s estimate is nearly double what it was when it first performed this calculation in 2002. At the time, it was $80,000 for a single retiree. And there are many caveats to consider when calculating your figure. How much you spend on medical care in retirement will vary depending on where you live, your overall health, and how many years you live in retirement.
Fidelity’s estimate assumes retirees are enrolled in traditional Medicare, which covers expenses such as hospital stays, doctor visits and services, physical therapy, lab tests, and more, between Medicare Parts A and Part B, and Medicare Part D, which covers drugs by prescription.
A major concern for retirement security
While Fidelity’s projection has been flat this year, that’s not the general trend in healthcare spending in this country. The cost to treat patients will rise by around 7% in 2024, unwelcome news for insurance premiums, according to a new report from PwC. The big increase comes on top of growth of more than 6% this year, compared to 2022, and 5.5% in 2022.
“Rising out-of-pocket healthcare costs, including the high risk of long-term care expenses, are a major concern for retirement security,” Richard Johnson, director of the Retirement Policy Program at the Yahoo Finance, told Yahoo Finance. Urban Institute.
Fidelity’s estimation may fall short for many Americans.
“Last year, I learned with our team that the average out-of-pocket health care costs for a couple in retirement were close to $450,000,” said Ken Dychtwald, CEO of Age Wave, a think tank and consulting firm. “It’s astronomical, and that almost never comes up in any kind of retirement discussion.”
How to plan your retirement health care expenses
According to Fidelity, about 15% of the average retiree’s annual expenses will be related to health. And nearly four in 10 retirees report that health care costs are higher than they expected when they retire, according to a survey by the Employee Benefit Research Institute (EBRI) and Greenwald Research.
“Our general message to our clients is that unmanaged healthcare costs can derail even the strongest financial plans,” Jacob Sadler, certified financial planner and senior advisor at Bay Point Wealth in Annapolis, Md. “It’s essential each year to figure out what your insurance options are, select the coverage that best fits your situation, and plan for cost increases over time.”
One way to prepare is through a Health Savings Account (HSA), which allows investors to contribute, invest, and withdraw money tax-free when used for qualifying medical expenses. HSAs aren’t an option for everyone, although some workers don’t have access to this type of account in the workplace, while it may be inaccessible to others as they are tied to high-deductible health plans.
The IRS announced new annual limit for 2024 on HSA contributions for individuals will be $4,150, an increase of $300 or 7.8% from the $3,850 limit in 2023. For family coverage, the HSA contribution rises to $8,300, up $550 or 7.1% from $7,750 this year. The Extra Recovery Fee for account holders age 55 and older remains set at $1,000.
“The bottom line here is that retirees will need to save a big chunk of change to pay for health care costs,” Jake Spiegel, research associate, health and wealth benefits, told EBRI.
And it is likely that it will be much more than you can even imagine. Fidelity’s estimates are “a good starting point, but they don’t capture any customization,” Christine Simone, co-founder and CEO of Caribou, a Miami-based fintech company that provides health planning software to consultants, told Yahoo Finance. financial.
“Estimates,” he added, “generally, don’t capture the complexity of someone’s unique situation and can be misleading.”
Kerry Hannon is a Senior Reporter and Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of 14 books, including “In Control at 50+: How to Succeed in Your New Job” and “Never too old to get rich.” Follow her on Twitter @kerryhannon.
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