Why Medicare Is Not Enough

The cost of healthcare is one of the biggest liabilities for retirees, most of whom don’t get nearly enough coverage from Medicare. Most folks need to plan ahead before retirement to find the right insurance to make up for the government program’s shortcomings.

Health costs, especially for retirees, are on the rise. An annual report from Fidelity Investments estimates that for a 65-year-old couple who retired in 2012, the cost of healthcare in retirement adds up to $240,000. That’s a $10,000 increase from 2011. Add the potential need for assisted living or nursing home care, and costs quickly escalate.

Another study from Nationwide Financial found that people near retirement grossly overestimate how much Medicare covers. According to the Employee Benefit Research Institute, Medicare takes care of only 51% of healthcare services. This means that retirees need roughly $120,000 (half of what Fidelity estimates) to cover health costs on their own. Expensive but common necessities such as vision exams and hearing aids are likely not covered.

On top of the high and unpredictable costs of care, the actual inflation rate for health care tends to be significantly higher than aggregate consumer prices, which makes anticipating the cost of health care all the more challenging.

So what does Medicare cover? Before you make any choices, first get familiar with what it covers before you research options to fill the gap. This very complex program has four parts:

Medicare Part A (hospitalization): Anyone over 65 who is eligible for Social Security benefits is covered by Part A at no charge. Spouses over 65 who are eligible for Social Security benefits based on their spouse’s earnings are also covered.

Medicare Part B (doctors’ services): Everyone eligible for the free Part A coverage can also purchase part B coverage by paying a monthly premium.

Medicare Part C (Medicare Advantage): A private plan run through Medicare that provides an alternative to parts A and B. Individuals pay for their own coverage.

Medicare Part D (prescription drug plan): Any person enrolled in Medicare Parts A or B is eligible for Medicare part D.

Research your options. The number of employers offering health insurance to retirees is shrinking rapidly. According to a Society for Human Resource Management survey of 600 human resources professionals, only 21.9% of companies offered health insurance to retirees in 2011. Even if your company lets you purchase insurance at group rates, that coverage only lasts a short time. Look into several options well ahead of your last day of work, such as: 

COBRA. The Consolidated Omnibus Budget Reconciliation Act, more commonly known as COBRA, requires some employers to offer terminated employees the right to purchase medical expense insurance coverage at group rates. Coverage after termination or retirement can cover the employee and an eligible spouse and dependents for up to 18 months.

COBRA can be quite costly, but is an option for those retiring before age 65, especially those with health problems that might make independent health insurance coverage costly.

Individual health insurance. As an alternative to COBRA, if you retire before age 65, research the cost of individual policies by contacting a trusted health insurance agent or shopping online at sites like www.esurance.com.

For those Medicare beneficiaries who want additional coverage, so-called Medigap insurance is available from many carriers at an additional cost. Medigap plans can offer many benefits that Medicare doesn’t, such as a partial coverage of emergency care charges accrued in a foreign country, at-home assistance with daily living and preventive care.

Long-term care insurance. Opinions vary, but the best age to buy long-term care insurance is in your mid-50s. Our health tends to deteriorate as we age, so lock in a good price by applying at a younger age. You might get discounts for good health.

Almost 40% of people over 65 eventually spend some time living in a nursing home. According to the Genworth’s 2012 Cost of Care Survey, Americans paid a median annual rate of $81,030 in 2012, up $15,330 per year, or 4.28% compound annual growth rate, since 2007. Medicare pays for only a short stay in a nursing home under very strict conditions and many health insurance policies don’t cover nursing home services at all. 

Health savings accounts (HSAs). If you are covered under a high deductible health plan, you can make tax-deductible contributions to health savings accounts. From a tax perspective, the HSA is a great savings vehicle. In 2013, a high deductible health plan for a family is any plan with an annual deductible – that’s what you pay out of pocket – of at least $2,500 and a limit on annual expenses of up to $12,500 (annual deductible and expense limits for individual plans are 50% of the family plan amounts). In 2013, you can make a tax-deductible HSA contribution of up to $6,450 per year for family coverage, or $3,250 a year for individuals.

With proper planning, you can be ready to face the challenge of keeping up with the cost of healthcare when you retire. If you are nearing retirement, sit down with your advisor to discuss the best way for you to ensure that health costs don’t get in the way of enjoying your life after work.

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Jordan Mills is a senior associate consultant at Wipfli Hewins Financial in St. Paul, Minn.

Hewins Financial Advisors, LLC and Wipfli Hewins Investment Advisors, LLC (together referred to as “Hewins”) are independent, fee-only investment advisers registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.  The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates.  The information contained in any third-party resource cited herein, including but not limited to other blogs, websites or articles, is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources.  Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of any of the content found therein or its use.  The standard information provided in this article is for general educational purposes only and should not be construed as, or used as a substitute for, financial, investment, legal or other professional advice.  If you have questions regarding your specific situation or any of the information contained herein you should consult your financial and/or legal professional.  Hewins is a proud affiliate of Wipfli LLP.  A copy of Hewins’ current ADV Part 2A brochure discussing Hewins’ investment advisory and financial planning services and fees is available for review upon request or at www.adviserinfo.sec.gov.

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