The High Cost of Growing Older

The High Cost of Growing Older  

Emily Brandon

No doubt, healthcare will be one of your biggest expenses in retirement. Qualifying for Medicare coverage at age 65 will quell some cost and coverage worries. But although Medicare is far more affordable than private health insurance coverage for seniors, the government health insurance program still leaves retirees with significant out-of-pocket costs.

Consider this: A typical 65-year-old married couple without chronic conditions will need $197,000 to pay for out-of-pocket medical costs throughout retirement, according to new calculations by the Center for Retirement Research at Boston College. That figure includes insurance premiums, services not covered by Medicare, and home healthcare expenses, but it excludes nursing-home care. Retirees also have a 5 percent chance that healthcare costs that are not covered by insurance will exceed $311,000, according to the study, which was underwritten by Prudential. "Regular ongoing out-of-pocket costs can really cumulate over the years," says Anthony Webb, associate director of research at the Center for Retirement Research at Boston College and coauthor of the study. "There is no substitute to having a lot of money stashed away."

Other researchers have come up with similarly large numbers. Fidelity Investments estimates that a couple, both age 65 in 2009, will need approximately $240,000 to cover medical expenses throughout retirement. And the Employee Benefit Research Institute determined that a 65-year-old couple in 2009 will need $210,000 to have a 50 percent chance of affording their retiree health expenses and $338,000 to have a 90 percent chance of being able to pay all their medical bills.

These eye-popping numbers are generally a tally of small expenses that add up throughout retirement. Here are the latest estimates of the health expenses most Americans will face.

Premium prices.

Insurance premiums are the most predictable retirement health cost. "There's more certainty to paying a premium than there is to paying your own expenses out-of-pocket," says Paul Fronstin, a senior research associate at the Employee Benefit Research Institute. For most people retiring in 2010, the Medicare Part B monthly premium is $110.50 per month. That price is usually deducted from a beneficiary's Social Security check before it goes in the mail. Retirees who earn more than $85,000 annually ($170,000 for couples) pay higher premiums of up to $353.60 monthly. Medicare Part D prescription drug coverage premiums vary, depending on the plan and coverage level, typically averaging $30 per month. Many retirees also purchase supplemental insurance to Medicare such as Medigap policies or receive retiree coverage through a former employer, which come with additional premium prices.

Cost sharing. 

The amount you will pay for copays and coinsurance for medical treatment in retirement is much more difficult to estimate. Retirees without supplemental insurance must pay 20 percent of the bill (at Medicare negotiated rates) for physician and outpatient services after meeting a $155 deductible in 2010. "There is no out-of-pocket limit with Medicare," points out Sunit Patel, a senior vice president at Fidelity. "When you have no supplemental policy, you could have a lot of volatility from one year to the next." Long hospital stays are also not completely covered. For example, a Medicare Part A recipient without supplemental coverage who is admitted to the hospital will be billed a $1,100 deductible for 2010, up $32 from 2009. If the hospital stay is more than two months, beneficiaries must pay an additional $275 per day for days 61 through 90, $550 for days 91 to 150, and all costs after that. Above-average prescription drug use could further inflate retiree health expenses, especially if you reach the gap in prescription drug coverage known as the doughnut hole. Some prescription drug costs can be controlled by shopping around for the lowest cost Part D plan that meets your coverage needs annually.

Uncovered expenses.

Retirees have some common medical needs that are not covered by Medicare. Dental care, eyeglasses, and hearing aids are among services seniors frequently require that Medicare does not pay for. Retirees need to budget for these expenses or consider a supplemental policy that covers them.

Long-term care.

None of the above health expense estimates include the savings needed for long-term care. Medicare pays for a maximum of 100 days of nursing home care before retirees absorb the entire cost themselves. When nursing-home costs are included, the amount needed for a typical couple's medical bills increases from $197,000 to $260,000 with a 5 percent risk of exceeding $570,000, according to Boston College estimates. Long-term-care insurance can help protect retirees from some of these catastrophic costs, but at a hefty price. Fidelity Investments calculates that a couple, both age 65 in 2008, would need $85,000 to pay for long-term-care insurance throughout retirement. "Some people use it to protect their assets, to avoid spending their assets," says Fronstin. "Very low-income people don't need it because they will qualify for Medicaid."

Healthcare inflation.

Future retirees are likely to spend far more of their budget on healthcare expenses than current retirees. For a couple planning to retire at age 65 in 2019, the lifetime healthcare cost estimates jump to $352,000 for a 50 percent chance and a whopping $567,000 for a 90 percent chance of being able to pay for Medicare Part B and D premiums, Medigap premiums, and out-of-pocket prescription drug expenses, EBRI found. "The number depends on how long you live, whether or not you get coverage to supplement Medicare, and how much costs and premiums go up," says Fronstin.

Median out-of-pocket costs for the typical senior are expected to rise from about $2,600 in 2010 to $6,200 in 2040 in constant 2008 dollars, according to a recent Urban Institute report. Retiree incomes, especially as traditional pension coverage continues to decline and workers fail to save enough in 401(k)'s, are unlikely to keep up. "Premiums are going to keep increasing for Medicare, Medigap, and employer-provided retiree health benefits and Social Security benefits won't be keeping up," says Richard Johnson, a senior fellow at the Urban Institute and coauthor of the study. "Seniors have to factor those likely cost increases into their budgeting." The Urban Institute estimates that seniors in 2040 will spend a median of 19 percent of their income on healthcare in 2040, up from 10 percent today.