As you approach retirement, a critical aspect of your retirement strategy can catch even the most financially savvy individuals off guard: healthcare costs. For decades, you may have enjoyed employer-sponsored health insurance. As retirement looms, you're about to enter unfamiliar territory and a healthcare landscape vastly different from what you've known.
Employer Insurance Disappears
Many successful professionals are surprised by the complexities and costs of healthcare in retirement. The ease of having your employer help with insurance decisions and subsidize a significant portion of your premiums ends for most when they retire. In retirement, you will be responsible for managing your healthcare options, which can involve evaluating a variety of plans and understanding potential changes in out-of-pocket costs.
The True Cost of Healthcare in Retirement
According to Fidelity's 2024 Retiree Health Care Cost Estimate, the average 65-year-old individual needs about $165,000 in after-tax savings to cover health care expenses in retirement. This figure is up nearly 5% from 2023 and doesn't include potential extended care costs.
Factors Driving Costs
There are many drivers behind the rising cost of healthcare for retirees, including:1,2
- Healthcare Inflation: Medical costs consistently outpace general inflation.
- Longevity: As we live longer, healthcare expenses accumulate over more years.
- Advanced Treatments: Cutting-edge medical technologies and procedures often have higher price tags.
- Increased Demand: The aging Baby Boomer population may strain healthcare resources.
Healthcare inflation continues to outpace general inflation, and with individuals living longer, the extra costs might add up over the years. This increase in cost is primarily due to greater demand driven by longevity and advances in treatment and technology. Procedures like joint replacement and cataract surgery, which were once rare, are now considered standard maintenance. Still, they carry higher costs as they impact greater numbers of Baby Boomers who want to stay active in their later years.2
These cost increases are particularly challenging for women, who face higher lifetime care costs due to a life expectancy that is longer than men.
According to a recent study, 80% of respondents are concerned about covering the cost of healthcare in retirement. Even factoring in Medicare coverage, experts estimate that by age 65, healthcare expenditures will likely amount to 15% of your overall spending, a figure that may nearly double by 2040. This figure will vary based on when and where you retire, how healthy you are, and how long you live.2
The Healthcare Landscape for Individuals Retiring Before Age 65
You can start to draw Social Security benefits at 62, three years before Medicare eligibility begins. This gap can be a source of emotional and financial stress. You may want to consider bridging this period with alternative coverage options, which can be costly and complex. If you are retiring before age 65 and don't have access to retiree health care coverage from your employer, there are four primary options for obtaining coverage.1,3
- COBRA coverage: The Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, allows you to continue your current health care coverage for a certain amount of time, but you may be required to pay the full cost of your health coverage, including the amount your employer had subsidized, plus an additional 2% charge.3
- Spouse's plan: If your spouse or domestic partner is employed and has health coverage, you may be able to get coverage on their employer's plan.3
- Public marketplace: The Affordable Care Act established the public market and provides plan options available to anyone who is not yet eligible for Medicare. Costs for these plans can vary widely.3
- Private insurance: To obtain coverage, you can also look to your local health insurance agent, trade or professional associations, and other so-called "private exchanges" that offer plans from multiple carriers. You may have more plan options available through these outlets than the public marketplace.3
Navigating Medicare Starting at Age 65
Medicare should be an important part of your retirement healthcare strategy. Most workers pay into the program their entire working lives. Just like Social Security, even if you have sufficient means, they will likely be the foundation of your needs in retirement.
As financial professionals, we can help you with many of your retirement needs, but to be clear, we are not Medicare experts. We will provide a brief overview here, but we have more detailed information we can send you, and we know a variety of professionals we will gladly put you in touch with.
There are many common misconceptions about Medicare, especially in terms of comprehensive coverage. Medicare has significant gaps, limits, and increasingly higher premiums and copays. High-income retirees face additional Medicare premiums, known as Income-Related Monthly Adjustment Amounts (IRMAA).1 Supplemental insurance can help fill the void and cover additional items like dental, hearing, and vision care.2
Understanding Your Medicare Options4
Four parts of Medicare (A, B, C, and D) were created to match your medical coverage needs and budget.
- Parts A (hospital insurance)
- Part A helps pay for inpatient care at:
- Hospitals
- Skilled nursing facilities
- Hospice
- It also covers some outpatient home health care.
- Part A is free if you worked and paid Medicare taxes for at least 10 years. You may also be eligible because of your current or former spouse’s work.
- Part A helps pay for inpatient care at:
- Part B (medical insurance)
- Part B helps cover the following:
- Services from doctors and other healthcare providers
- Outpatient care
- Home health care
- Durable medical equipment
- Some preventive services
- Most people pay a monthly premium for Part B. The exact premium depends on your income level.
- Part B helps cover the following:
- Part C (Medicare Advantage)
- Part C is known as Medicare Advantage. Private companies run Medicare Part C. The federal government approves each plan. Costs and coverage types vary by provider. It’s an alternative to Parts A and B that bundles several coverage types, including Parts A, B, and usually D. It may also include:
- Vision
- Hearing
- Dental
- You must sign up for Part A or B before enrolling in a Medicare Advantage plan.
- Part C is known as Medicare Advantage. Private companies run Medicare Part C. The federal government approves each plan. Costs and coverage types vary by provider. It’s an alternative to Parts A and B that bundles several coverage types, including Parts A, B, and usually D. It may also include:
- Part D (prescription drug coverage)
- Part D helps cover prescription drug costs. Private companies run Medicare Part D.
- You must sign up for Part A or B before enrolling in Part D.
- Part D helps cover prescription drug costs. Private companies run Medicare Part D.
Medigap Policies5
Medicare Supplement Insurance (Medigap) is extra insurance from a private health insurance company to help you pay for out-of-pocket costs in Original Medicare (Parts A and B). Generally, you must have Original Medicare (Part A) to buy a Medigap policy.
- Medigap policies help cover the following:
- Copayments
- Coinsurance
- Deductibles
Importantly for high-net-worth individuals, some Medigap policies cover services that Original Medicare doesn't, like emergency medical care when traveling outside the U.S.
- Medigap plans generally don’t cover:
- Extended care (like a nursing home)
- Vision or dental care
- Hearing aids
- Eyeglasses
- Private-duty nursing
Medigap premiums vary widely depending on the insurance company, the plan, and where you live. Each company decides how to set the price for its policy.
Unique Healthcare Considerations for High-Net-Worth Individuals
High-net-worth individuals have specific challenges and opportunities when managing their healthcare costs and insurance options. Their unique needs, along with their financial standing, lifestyle, and desire for privacy, often require a tailored approach.
- Private Insurance
High-net-worth health insurance policies often come with unique features. These private plans can target particular needs and accommodate elements like international coverage, access to top medical specialists, and faster medical services. This is above and beyond what standard health insurance policies emphasize.6 - Concierge Medicine
Concierge medicine, known as retainer medicine, presents an alternative for high-net-worth individuals seeking personalized healthcare. With concierge services, individuals pay an annual fee to a chosen physician or medical practice. Those fees can be as high as $20,000 per year. In return, they receive expedited appointments, longer consultation times, and a more direct line of communication with their healthcare provider. This approach ensures that medical care is prompt and highly individualized.6 - Health Savings Accounts (HSAs)
If you have a high-deductible health plan (HDHP) with your employer, contributing to an HSA during your working years may allow you to accumulate tax-advant...