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It sounds daunting, even overwhelming, to consider the total cost of healthcare in retirement. Research from the Employee Benefit Research Institute found that a 65-year-old couple retiring today may need as much as $351,000 to have a 90% chance of covering their medical expenses in retirement.
But according to Sudipto Banerjee, a global retirement strategist at T. Rowe Price, that widely cited figure is misleading and can create needless anxiety.
“My first point would be not to really focus on … that one single number,” Banerjee said in a recent Decoding Retirement podcast. “It’s basically what a couple will spend over 30 years. It’s just the sum of that.”
For those approaching retirement, Banerjee explained that the more useful focus is cash flow — understanding your income, your expenses, and how much you’ll spend on healthcare each year.
“Healthcare is not something where you retire one day, then you cut a check for $350,000 to someone and it’s taken care of,” he said. “It doesn’t work like that. It’s an ongoing process, and every year you have to make decisions.”
Rather than obsessing over total lifetime costs, Banerjee recommended a practical two-bucket approach.
In the first bucket, plan for predictable premium costs, and build Medicare Part B, Part D, and supplemental insurance premiums into your regular cash flow. These costs are relatively stable and predictable, making them suitable for budgeting like any other fixed expense.
In the second bucket, maintain a separate cash reserve of $5,000 to $10,000 for deductibles, copays, and unexpected medical expenses. Replenish this fund annually as unpredictable out-of-pocket expenses come up.
“You have a very good idea how much you are going to need for your health insurance premiums, so you can basically build that into your cash flow,” he said. “The more trickier part is the out-of-pocket expenses, where you might not know exactly how much you’ll need.”
This approach acknowledges that retirement healthcare isn’t a single large bill, but a series of ongoing decisions and payments that can be managed systematically.
Read more: A step-by-step guide for retirement planning
Another major driver of healthcare costs is Medicare coverage. The choice between traditional Medicare, Medicare Advantage, and adding a Medigap policy can significantly affect both expenses and protection against unexpected bills.
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“It’s a really important decision,” Banerjee said. “When it comes to healthcare in retirement, the choice of plan — whether you go with traditional Medicare, Medicare Advantage, or add a Medigap policy — deserves a lot of attention.”
For those considering Medigap, Banerjee suggests starting with two questions: Can you afford it? And why do you want it?
“Medigap typically costs more — on average about $2,000 a year — so there’s an affordability question,” he said. “If you can cover that extra cost comfortably, that’s great.”
Elizabeth Gomez, 54, of Huntington Park, Calif., right, receives a Prevnar and shingles vaccine by pharmacy manager Sandra Gonzalez at CVS on Aug. 28, 2024. (Christina House/Los Angeles Times via Getty Images) ·Christina House via Getty Images
Banerjee added that many choose Medigap to limit out-of-pocket expenses, since traditional Medicare involves deductibles, coinsurance, and other cost-sharing. But Banerjee’s research shows average annual out-of-pocket spending for Medigap enrollees is about the same as for those with other coverage — except at the high end of spending, where Medigap offers greater protection.
“People with Medigap tend to use more healthcare,” he explained. “They know they have that protection, so they consume more services.” His advice: If you expect Medigap to automatically lower your yearly out-of-pocket costs, understand that may not happen — higher utilization can offset the savings.
This decision is even more critical because switching from Medicare Advantage to traditional Medicare with Medigap later in retirement is “virtually impossible” if health issues arise.
Long-term care is another wildcard in retirement planning. Many fear they’ll one day need nursing home care and won’t know how to pay for it, whether through insurance, self-funding, home equity, Medicaid, or a combination of these.
“This is a classic example of what we call tail risk,” Banerjee said. “For most people, if you look at the average, people don’t spend anything on long-term care out of pocket. But a very small percentage will spend a large amount. And this is sort of a classic case where you would think that it’s … a situation to be addressed by insurance because it’s a tail risk.”
The problem, he said, is that “the long-term care insurance market has not performed or functioned very well over the years … the policies are very expensive. So people don’t want to be spending so much on these policies and never needing the care.”
Financial circumstances often dictate the approach.
Those with lower incomes often use Medicaid as a fallback, while those with higher incomes are often able to self-fund their care. It’s the middle market that must weigh protecting assets from Medicaid against paying for coverage they might never use.
And timing insurance coverage is critical. “You don’t want to be too late when you have health issues crop up and your premiums will really go up, and you don’t want to get it too early when you are spending on premiums for a long period,” Banerjee said. “So I think somewhere between 55 and 65 is a good period to consider long-term care insurance.”
Read more: How to pay medical bills — 6 options for dealing with debt
If you expect to stay at home for a while and then move into a continuing care facility, knowing that in advance can help you choose the right long-term care insurance.
Broad “umbrella” policies cover almost any living arrangement but cost more, he said. If you’ve already decided where you’ll live, a more targeted policy may be cheaper.
Whatever you choose, compare costs, coverage limits, and benefits — and do your homework before buying.
Got questions about retirement? Email Robert Powell at [email protected], and we’ll do our best to answer it in a future episode of Decoding Retirement.
Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future on Decoding Retirement. You can find more episodes on our video hub or watch on your preferred streaming service.
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