What’s the biggest risk to your retirement security?
I’ll give you a hint: It’s something you may take for granted when it’s good and that can be life-changing when it’s less than good.
It’s your health, and more specifically, health-care costs. In fact, health care in retirement could cost you and your spouse more than a quarter million dollars. Yet, in a 2014 BlackRock study, fewer than half of Americans surveyed called out health care as a stress point.
This tells me that many people planning for retirement could use some guidance on their potential out-of-pocket health costs, along with insight on the ins and outs of Medicare.
While certainly not comprehensive, here are three key points to think about:
1. A 65-year-old couple would need $270,000* to have a high probability of being able to cover health-care costs across retirement, according to the Employee Benefit Research Institute (EBRI), a nonpartisan research group in Washington, D.C.. That figure is for “typical” medical care. Couples with “above-average” medical costs are looking at out-of-pocket expenses in the area of $325,000. And that doesn’t include long-term-care costs.
2. Medicare is more complicated than you think. Most people are familiar with the “traditional” Medicare you can sign up for at age 65—Parts A and B, which cover inpatient and outpatient care, respectively. While most people do not pay a premium for Part A, you may not be aware that Part B premiums are charged on a sliding scale based on income. For example, couples with income below $170,000 who file joint tax returns pay $104.90 per person, per month, in 2015. Those premiums rise to $209.80 per person for couples with incomes between $214,000 and $320,000.
All told, Parts A and B will not cover 100 percent of your health expenses. And while you may get some level of retiree health benefits from your former employer, those benefits are dwindling, according to the nonprofit Kaiser Family Foundation. That means you might also need to budget for:
- Supplemental coverage, often through what’s called a “Medigap” policy, to help pay uncovered costs.
- Part D prescription drug plan premiums and co-pays.
- Other expenses for which Medicare often pays little or nothing, including hearing aids, dental work and vision care.
3. There are ways to get ready. Consider taking advantage of any pre-tax vehicles that let you save for future medical costs while you’re still on the job, particularly a health savings account (HSA). Contributions can be used to pay for current medical costs, but any unused dollars accumulate. And you can make tax-free withdrawals in retirement if the money is used for medical costs.
Do your homework before you sign up for Medicare as well. From the supplemental option to the Part D prescription-drug coverage you pick, you need to fully research that they provide what you need—and don’t include extras you won’t use, such as coverage outside the U.S. if you plan to stay close to home. You also should review your choices every year, because your prescription-drug needs may change, or the drugs that the plan covers could change, too.
And build those expenses into your retirement income plan. BlackRock’s retirement expense worksheet can help you get started. I also invite you to read Medicare Mythbusters, which offers more insight on the federal government’s health insurance program for older Americans.
* This figure is as of 2014 and represents the present value of savings, earning an average 7.32 percent annual return, needed to cover typical health insurance premiums and out-of-pocket expenses for a couple starting at age 65 with typical medical costs, according to EBRI.
Rob Kron, Managing Director, is the head of Investment and Retirement Education for BlackRock’s U.S. Wealth Advisory group. He provides practical information on topics that are important to every saver and investor of every age.