With Medicare coverage and new caps on prescription drug costs, many retirees might assume their health care costs are largely covered. But the reality is that some retirees might need to stash away hundreds of thousands just to keep up with medical bills.
A recent report from the Employee Benefit Research Institute suggests that some couples could need as much as $469,000 for medical costs alone.
Here’s a look at EBRI’s findings, which included a review of Medicare premiums, out-of-pocket expenses and drug costs.
The new prescription drug cap is not enough
The Inflation Reduction Act capped annual out-of-pocket spending for Medicare Part D prescription drugs at $2,000 starting in 2025. That offers protection if you rely on expensive medications. But according to the EBRI findings, that doesn’t erase the need for a sizable nest egg for health care.
Paul Fronstin, director of health benefits research at EBRI, explains in a summary of the findings:
“Health care costs remain a major financial challenge in retirement, even for people covered by Medicare. While the new Medicare Part D out-of-pocket cap offers important financial protection, our analysis shows many retirees will still need significant savings to have a reasonable chance of covering health care expenses throughout retirement.”
Medigap enrollees face higher savings targets
If you opt for Medigap supplemental insurance, you’ll need to save more than if you go with a Medicare Advantage plan.
According to the report, a couple with a Medigap plan and average premiums might need $267,000 just to have a 50% shot at covering their medical expenses. Want 90% certainty? That target skyrockets to $405,000.
The highest number in the analysis applies to couples with expensive drug costs. To have a 90% chance of covering everything, those couples would need to set aside $469,000.
It’s cheaper for singles, but still costly:
- A 65-year-old man with Medigap and average premiums would need $120,000 for a 50% chance of meeting expenses, or $212,000 for 90% confidence.
- A 65-year-old woman would generally need more, requiring $146,000 for a 50% chance and $252,000 for a 90% chance.
Medicare Advantage offers lower targets with trade-offs
Savings targets might be easier to reach by enrolling in a Medicare Advantage plan.
A man with median drug expenses and average health care use would need roughly $61,000 for a 50% chance of covering costs and $106,000 for a 90% chance. For a woman in the same boat, those numbers are $74,000 and $125,000.
Couples would need $135,000 to reach 50% confidence and $203,000 to hit 90%.
The downside is that these plans often come with restrictive provider networks and might require prior authorization for specific services.
Whatever Medicare coverage you go with, planning for out-of-pocket expenses is critical to protecting your financial well-being.
Jake Spiegel, senior research associate at EBRI, explains:
“Retirees and workers nearing retirement should not assume Medicare will fully shield them from potentially high health care costs. These findings highlight the importance of planning ahead and understanding the trade-offs among coverage options, including differences in premiums, out-of-pocket costs and access to care.”
The EBRI analysis might actually underestimate the total bill since it doesn’t include costs for things Medicare doesn’t cover, such as long-term care, dental visits and vision exams. That’s a compelling reason to start building savings now so that a medical surprise in your 70s doesn’t derail your financial plans.
Be better prepared for Medicare coverage by checking out our reporting in “8 Things Most People Don’t Know About Medicare.”
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