:max_bytes(150000):strip_icc()/GettyImages-21642568911-4302a49ab443441a8cfe98dbb3f946af.jpg "Health Care Expenses Can Significantly Reduce Retirees’ Income—Here’s What To Know")
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Key Takeaways
- Even with Medicare, out-of-pocket health care costs still eat into people’s retirement income.
- After medical costs, the typical retiree is left with about 88% of total income and 71% of Social Security benefits.
- Choosing the right Medicare coverage and planning ahead using accounts like HSAs while you’re working can help you better manage health care costs after you stop working.
Medicare helps defray medical costs for retirees, but health care spending still takes a big chunk out of peoples’ savings, according to a new report.
A typical retiree had just 88% of their total income and 71% of their Social Security benefits left after paying for out-of-pocket (OOP) medical costs, according to a brief released this week from the Center for Retirement Research at Boston College. Out-of-pocket medical costs can include insurance premiums, doctor’s visits, and prescription drugs.
“With OOP health expenditures already eating away at retirement income, the uncertainty about further health policy changes, and Social Security drawing ever closer to trust fund depletion, it is understandable why many retirees feel that making ends meet is difficult,” wrote Boston College Researcher Matthew Rutledge.
What This Means For You
Health care costs take a noticeable bite out of retiree income—even with Medicare. This can place financial pressure on retirees, making it harder for them to get by on their Social Security income and retirement savings.
Currently, the Social Security trust fund reserves that help pay out benefits to retired workers and survivors of deceased beneficiaries are estimated to run dry in 2033. After that, recipients will get only 77% of their expected benefits.
Don’t Assume You’ll Save With Medicare Advantage
It’s important to choose your Medicare plan carefully when weighing whether it’s best to enroll in Original Medicare (and maybe a Medigap policy) or opt for Medicare Advantage instead.
Medicare Advantage is a type of insurance policy sold by private insurers that retirees can purchase for their Medicare Part A (hospital insurance) and Part B (medical insurance) services. Some Medicare Advantage plans charge premiums on top of Part B premiums, while others don’t. However, these plans do cap expenses for covered Part A and Part B services.
Although Medicare Advantage policies limit yearly expenses for certain services, Rutledge found that both Medicare-only and Medicare Advantage policyholders spent a similar portion of their income on medical expenses, ending up with 87% and 88%, respectively, of retirement income after OOP health care spending.
And unlike Original Medicare, Medicare Advantage plans typically have limited provider networks. So when enrollment time rolls around, make sure your preferred doctors are within network if you opt for a Medicare Advantage plan over Original Medicare.
Start Saving Now For Medical Expenses In Retirement
If you’re worried about health care spending eating away at your retirement income and you’re still working, you can stash money in a health savings account (HSA) if you have one.
HSAs are only available to people with a high deductible health insurance plan. They offer a triple tax advantage: contributions are tax-deductible, contributions grow tax-free, and withdrawals are tax-free when used for qualified medical expenses.
Although you can’t contribute to an HSA after you enroll in Medicare, you can invest your HSA funds, allowing them to compound over time while you’re working. Plus, you can use HSA money to cover your Medicare premiums in retirement.
