Ask a room of aspiring retirees, as I often do, to name their number one worry as they approach calling it quits and the overwhelming consensus will be the affordability of health care. This seemingly primal fear is both reflected and fueled by much-publicized studies that show staggering sums for the expected costs.
“65-Year-Old Couple Retiring Today Will Need an Average of $315,000 for Medical Expenses” blares the press release for the 2022 edition of the now two-decade-running Fidelity Investments.
The usually sober Employee Benefits Research Institute (EBRI) comes up with similar numbers, albeit with far more nuance and variance. Its most recent study, released in February 2023, creates a per couple range from $72,000 to $383,000.
This is particularly scary given the context. EBRI places the average 401(k) balance of people in their 60s, with 30 years of participation, at roughly $350,000.
Is the average American really facing a future of devoting her entire retirement nest egg to health care? Is the alternative to go from the timeclock to the casket, unable to break free due to the cost of care?
Both logic and evidence say no. You’ll be just fine.
I’ll explain in detail below.
But here’s the gist: if you’re high-income, your premium costs may be high, but you can afford them. If you’re low-income, the entire system will be yours for free. If you’re middle-class, you’ll have a variety of options to make the expenses affordable and predictable.
Empiricism Rules
First the evidence. Health care’s been expensive and getting more so in America for a long time. Yet as brutal as reports of the bills are, seniors seem to be managing just fine.
The bankruptcy rate for those over age 65 is barely within a rounding error of zero. Of 374,240 personal bankruptcies in America in 2022, a mere 8 percent were among the over-65 age group. There are 56 million seniors in America. This comes to 0.05 percent of the over-65 population.
EBRI’s annual study on retirement readiness consistently finds that retirees are satisfied with their finances and their ability to meet their expenses.
And data collected on health care spending comes up with far lower numbers. The Bureau of Labor Statistics Consumer Expenditure Survey of 2021, for example, pegs total average annual health care spending for American households headed by 65- to 75-year-olds at just under $7,000.
An empirical study for T. Rowe Price by long-time health researcher Sudipto Banerjee places average annual out-of-pocket health costs for seniors at $700 to $900. An earlier study by Dr. Banerjee for EBRI found that, on average, retirees spent $27,000 out of pocket from age 70 to 95. This spending does not include Medicare Part B premiums. Other researchers including Vanguard Investments and New York Life have also shown that health care costs are manageable.
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The $45,000 Restaurant Bill
Where’s the disconnect?
The big-number studies are designed to scare people, not to reflect reality. Fidelity’s shocking sums are generated by capitalizing all expected health care costs—including premiums taken directly from your Social Security check—into a lump sum at the start of retirement.
Consider that by this same logic, you’ll need $45,000 at retirement to fund the average American’s restaurant bill, $95,000 for groceries, and $80,000 for utilities. These numbers are simply the lump sum of the expected annual costs for these items based on data from the Bureau of Labor Statistics Survey of Consumer Finances.
For all but the most analytical, this is not a particularly useful way to look at your expected health care costs or their affordability. In fact, it’s not a useful way to look at any expected costs or affordability.
But even this is not the largest problem.
The Fidelity Retiree Health Care Cost Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government's insurance program, Original Medicare. The investment firm’s calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. Fidelity’s estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.
In other words, Fidelity is assuming that Americans don’t have any supplemental coverage nor enrolled in a Medicare Advantage plan!
Yet we know that nine in 10 people with Medicare either had traditional Medicare along with some type of supplemental coverage (Medigap: 21%; employer-sponsored insurance: 18%; and Medicaid: 12%) or were enrolled in Medicare Advantage (39%) in 2018, according to Kaiser Family Foundation.
In other words, only one in 10 Medicare beneficiaries have original Medicare only and therefore fit the assumptions of the Fidelity model.
Cash Flow Is King
We don’t live off lump sums, after all, but rather we live off the income they generate. In retirement, you will have substantial monthly income that is unattached to any lump sum. That’s Social Security and perhaps a pension.
Let’s take it one month at a time.
We’ll start with Medicare, since with a few exceptions such as federal retirees, that’s where most of us will end up.
In 2023, the standard Medicare premium for Part B is $164.90 per person. If you’re collecting Social Security, it’ll come directly from your check. Chances are, you’ll barely notice the dough is gone, just as most people can’t quote their pre-tax employer-deducted health care premium. Seven in 10 enrollees pay just the standard premium.
The tab can be higher for retirees that Uncle Sam considers high-income. Make more than $97,000 (double if you’re married), and you’ll find yourself in IRMAA land. This stands for Income-Related Monthly Adjustment Amount. Make enough and your Part B premiums more than triple to $560.50 a month. Only three in 10 enrollees pay an additional premium for Part B.
We spend a lot of time managing this for our clients. It’s no fun and makes people mad. But, by definition, the folks it affects can afford it. This unwelcome hit won’t cause them to be evicted because they can’t make rent.
Is the Medicare Part B premium an out-of-pocket expense, like that cable bill that keeps creeping up? Technically, I say yes and model it as such for my clients. Practically, it feels automatic, provided you are collecting Social Security. (If not, the bill comes quarterly so you’ll feel the pain.)
Medicare Part A, which covers hospital stays, is free to collect, provided you’ve paid into the system or are married to someone who has. You may pay for this, but it’ll be indirectly and because you’re working and paying FICA while collecting it.
Alas, there are at least two more potential bills. I say potential because just as high-income people pay more for Medicare, low-income retirees may actually pay nothing.
Filling[EP1] [GU2] [GU3] the Gaps
Medicare arrived on the scene in 1965. Parts A and B reflected the structure of private health insurance in those days. Things have changed a lot since then, but less so with traditional Medicare. This traditional Medicare structure creates plenty of deductible and coverage gaps that should be filled.
Part A picks up the tab for hospital stays only after a $1,600 deductible which covers the patient’s share of costs for 60 days. For days 61 to 90, the daily bill jumps to $400. For days 91 to 150 it’s $800 per day and unlimited after that. There’s no out-of-pocket maximum.
Part B pays the doctors. The deductible is a more manageable $226 after which patients face a 20% co-pay.
Clearly, the costs could stack up for a long hospital stay or an expensive chronic condition. So, you’ll likely want to get supplemental or Medigap insurance, enroll in a Medicare Advantage plan, or pick up some government subsidy if eligible.
The average cost for the most popular Medigap plans is between $135 and $185 a month. Medigap is extra insurance you can buy from a private health insurance company to help pay your share of out-of-pocket costs in Original Medicare.
One in two Medicare recipients are enrolled in Medicare Advantage plans. The average monthly premium for these plans in 2022 was $18.
As of 2022, there are 12 million people age 65 and older who are dually eligible for Medicaid and Medicare. This means that they are enrolled in both programs and receive benefits from both. Dually eligible individuals make up more than 15% of all Medicaid enrollees.
Suffice to say that many people don’t face the same health care costs in retirement as those who are enrolled only in original Medicare.
But we’re working on the worst case, so let’s stay with paying for a gap plan.
So now we are up to $350 per month per person ($164.90 for Medicare Part B and $185 for a Medigap plan) or $700 per month per couple.
Don’t Forget Your Pills
There’s also Part D, the prescription drug plan, to consider. The average monthly cost of these plans in 2023, according to KFF, is $43 per month.
Add it Up
For the middle-income American retiree, the bill per beneficiary will[EP4] [LM(5] be just under $400 a month. Of this, $228 will come out of pocket. In fact, according to the Consumer Expenditure Survey, the average household headed by a 65-year-old will spend $4,954 on health insurance premiums. Given that the average income is $63,319, this is 8% of income.
In our practice, we conservatively estimated $1,000 a month or $12,000 per year per Medicare-eligible couple when doing projections.
Beware of Averages
No doubt, the average won’t apply to you. If you’re reading Retirement Daily, chances are you have a few dollars. If too many of these dollars are in the form of monthly income you will confront IRMAA. This won’t put a smile on your face. But it won’t send you to the soup kitchen either. We employ many strategies to contain this beast for our clients, but that’s not the focus of this article. It’s not a scarcity of funds problem. (Read Avoid This Pitfall When Planning for IRMAA.)
For those under the IRMAA limits, you may have some great options to future reduce your costs. Start with your employer. KFF finds that one in five Medicare beneficiaries are getting some employer support. The help may come in three potential forms.
First, many large employers help pay for the supplemental plans. Take that away, and you’re down to $208 per person with only Part D coming from your checking account.
A second piece of help may be an employer-funded Health Reimbursement Account (HRA). This may come as an annual subsidy to use for health care or as a one-time lump sum at retirement of which you can spend a portion each year.
Finally, during your working years, your employer may have put plenty of money into a health savings account (HSA) for you. This travels with you. For some reason, it cannot be used to pay for Medicare supplemental plan premiums. It can, however, be used to reimburse you for Medicare Part B premiums as well as other qualified health care expenses.
The Zero-Cost Option
How would you like to pay nothing?
Your answer is probably dependent on why? Recall that the KFF study shows that two in 10 Medicare recipients are on Medicaid as well. This is known as dually eligible and if one qualifies, the price of Medicare and gap insurance is zero.
In many states, it’s rolled up into the Medicare Savings Programs and there are several plans. The federal government has an income limit as low as $20,000 and an asset test of $13,630 for married couples. At this level of income and assets, any premium would be a huge hardship. This plan takes care of the neediest American seniors.
That said, I’ve known people with high six figures in investment assets who get free Medicare. Crazy, perhaps, but nevertheless true. They’ve just figured out how to work the system.
It’s very important to understand the rules and how they are applied in the jurisdiction in which you live. Although the federal website lists asset tests, they may be different in your state. In Connecticut, people with incomes below $28,680 pay nothing for a comprehensive Medicare package.
Income is not what you spend. It’s what you remove from taxable accounts and other taxable sources, such as Social Security and pensions. Retire at 65 and delay your Social Security until age 70. Limit pre-tax withdrawals to $2,300 a month and you’re good to go. Remove the rest from a bank account. Take low-cost loans from your life insurance policy. Or maybe from a reverse mortgage. This is not considered income. These are just some options. There are plenty more.
What about your assets? The government of Connecticut is clear. “Is there an asset limit?” the brochure asks. “No. There is no asset limit for any of these programs.”
Crack Your State’s Code
Check your state’s rules and plan accordingly. What works in Connecticut won’t work in my new state of Florida.
These savings can surely add up. They’ll be time limited, however. At age 70, you’ll be smart to collect Social Security and that will put you back on a payment plan.
Be careful, because you may give all the savings back when your RMDs kick in at age 73 if that puts you into IRMAA. This stuff is tricky. You must do the calculations. The key that makes this strategy possible is having the foresight to build up after-tax assets that can be drawn down prior to age 70.
For You Young’ns.
You can see that Medicare is not going to break you. Back to the summary. If you’re in IRMAA, you can afford it. If you’re under-resourced, you have the Medicare Savings Programs, which are are federally funded programs administered by each individual state. These programs are for people with limited income and resources to help pay some or all of their Medicare premiums, deductibles, copayments, and coinsurance.
If you’re in the middle, you have many options including zero-cost Medicare Advantage, and perhaps Medicare Savings with enough planning.
But what about getting to Medicare for early retirees? Leaving employer-supported group health plans is plenty scary.
If this applies to you, take a deep breath. It’s far better than you think. The old days of job-lock are gone, having given way to fun-and-games with the Affordable Care Act (ACA).
Keep (Him/Her) Working
The best option for those who have this option is to stay on a spouse’s plan—that is, keep a spouse working while you, well, take it easy. I’ve seen this work well, at least for the lounger. If you’re not married, see if you can get into a committed relationship quickly and claim domestic partnership with a still productive member of society. Given the employer subsidy, group insurance is usually a better deal than the stuff we get on the individual market.
If you’re technically single like me or lucky enough to be retiring in synchrony with a spouse—and you’re not age 65—you have some good options.
There’s always 18 months of COBRA, a thankfully cogent acronym for the Consolidated Omnibus Budget Reconciliation Act. This law allows you to keep your group plan for 18 months provided you pay 102% of the premium. Retire close to age 65 or have serious health issues and this can be an attractive option. Others will likely head to the ACA exchanges.
Your Time to Collect
Every American now has a right to health care provided through an exchange at standardized prices. These exchanges are either state-run or facilitated by the federal government through healthcare.gov. This is how I get my insurance so I’m very familiar with it and I know it works and works well.
Prior to age 65, you’ll have an array of insurance options. You can get PPOs, HMOs, and EPOs. You can get high-deductible health plans with HSAs, my favorite. You can’t get turned down or charged more due to your health, except for smoking.
The quoted premiums may in fact be quite large. Don’t worry. You’ll likely find a workaround.
Uncle Sam to the Rescue
The premiums in most cases are too much for people of modest income to afford. We’re a democratic republic and this is understandably unacceptable to the people who want our votes. Therefore, subsidies (advance premium tax credit) are available for those of limited income.
By now, you likely can guess the strategy. Uncle Sam’s generous subsidies are based on taxable income. That is, income produced by earnings, withdrawals from pretax retirement accounts, and dividends and interest. The stuff that hits your tax return.
Just as post-65-year-olds can get free Medicare by drawing down bank cash instead of tapping taxable IRAs, the pre-65 set can draw down gobs of government money to pay their insurance premiums. Your $2 million in IRAs, 401(k)s, Roth IRAs, non-qualified annuities, and low-interest bank-accounts have no effect on the subsidies. Only the taxable income created by these accounts dings you.
Free Ride Until 70
If you prepare early enough and apply some street smarts, you may be able to retire early and get a decade of free health care. Pile up your funds in places that don’t count: after-tax investment accounts, bank accounts, cash value life insurance, non-qualified annuities, and Roth IRAs.
So much for needing that $315,000 that Fidelity claims you need. Use it on boats, vacations, cars, and dining out. If you’re particularly frugal, you might calculate and invest the subsidies you pulled down from the ACA and Medicare Savings Program. You can then use the government’s money and the earnings on it to fund a lifetime of future Medicare premiums. You may make money on the deal.
Back here in reality
Now for the disclaimer. I don’t know you. Perhaps none of these strategies apply to you. You may need to fret about health care costs in retirement. If you find yourself on Medicare Parts A, B, and D with no access to a Medicare Advantage plan or a reasonably priced Medigap plan, you may be in big trouble.
I doubt that this is the case. My guess is that once you hit Medicare, you’ll be well covered. At an average combined monthly cost of $2,069, your utility, grocery, and housing bills—all necessities—will be a far larger burden than health care. Using Fidelity’s methodology, you’ll need $500,000 in savings just for these. Don’t hold your breath waiting for a study and news story on this. It violates common sense. It’s easily covered from the $2,739 a month your household receives in Social Security. Who would publish that drivel.
Michael Lynch CFP is a financial planner with the Barnum Financial Group in Ft Myers, FL, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and It’s All About the Income: A Simple System For a Big Retirement, May 2022. You can find more articles and videos at www.simpleandbig.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.
Michael Lynch is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. [link to www.SIPC.org on electronic advertisements] [6 Corporate Drive, Shelton, CT 06484 Tel: 203-513-6000
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