Why Some Retirees Will Need Over $200K in Health Care – Even with Medicare

With Medicare coverage and new caps on prescription drug costs, many retirees may think that their health care costs are largely covered. But the reality is that some retirees may need to stash away hundreds of thousands just to keep up with medical bills.

A recent report by the Employee Benefit Research Institute suggests that some couples may need as much as $469,000 in medical expenses alone.

Here are EBRI’s findings, including a review of Medicare premiums, out-of-pocket costs and drug costs.

The new prescription cap is not enough

The Inflation Reduction Act caps annual out-of-pocket spending for Medicare Part D prescription drugs at $2,000 starting in 2025. That provides protection if you rely on expensive drugs. But according to EBRI’s findings, that doesn’t eliminate the need for a large health care nest egg.

Paul Fronstin, director of health benefits research at EBRI, summarizes the findings:

“Health care costs remain a major financial challenge during retirement, even for people covered by Medicare. While the new Medicare Part D out-of-pocket cap provides significant financial protection, our analysis shows that many retirees will still need to save significantly to have a reasonable chance of covering health care costs during retirement.”

Medigap enrollees face a higher savings target

If you choose Medigap supplemental insurance, you will need to save more than if you go with a Medicare Advantage plan.

According to the report, a couple with a Medigap plan and moderate premiums may need $267,000 just to have a 50% shot at paying their medical expenses. Want 90% certainty? That target rises to $405,000.

The top number in the analysis applies to couples with expensive drug costs. To have a 90% chance of covering everything, that couple would need to set aside $469,000.

Cheaper for couples, but still expensive:

• A 65-year-old man with Medigap and average premiums would need $120,000 to have a 50% chance of meeting costs, or $212,000 for a 90% confidence.
• A 65-year-old woman will typically need more, requiring $146,000 for a 50% chance and $252,000 for a 90% chance.

Medicare Advantage offers a lower target through the exchange

Savings goals may be easier to reach by enrolling in a Medicare Advantage plan.

A man with average drug costs and average health care use would need about $61,000 with a 50% chance of covering the costs and $106,000 with 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 reach 90%.

The downside is that these plans often come with limited provider networks and may require pre-authorization for certain services.

Regardless of which Medicare you go with, planning for out-of-pocket expenses is essential to protecting your financial well-being.

Jake Spiegel, senior research associate at EBRI, explains:

“Retirees and near-retirement workers should not assume that Medicare will fully protect them from potentially high health care costs. These findings highlight the importance of planning ahead and understanding the trade-offs between coverage options, including differences in premiums, out-of-pocket costs and access to care.”

EBRI’s analysis may underestimate total premiums because it excludes costs for things Medicare does not cover, such as long-term care, dental visits and vision tests. That’s a strong reason to start building savings now so that a medical emergency in your 70s doesn’t disrupt your financial plans.

Get better prepared for Medicare coverage by checking out our coverage of “8 Things Most People Don’t Know About Medicare.”