Why Retirees Can’t Rely on Medicare for Healthcare Expenses

For the average American, healthcare in retirement will cost more than they have in their entire savings account.

And unfortunately, Medicare won’t help.

Healthcare, of course, is the single biggest line item that most retirees need to prepare for. Recently, a study released by the EBRI (the Employee Benefit Research Institute) emphasized how important that is. The institute’s data finds that despite the coverage offered by Medicare, retirees should expect to pay significant out of pocket costs for their healthcare during retirement. These costs cover a range of expenses, including insurance premiums, program deductibles and prescription drug treatments.

For help planning your retirement, including how to pay for healthcare, consider working with a financial advisor.

Healthcare Cost Details

Exactly how healthcare costs for retirees can go ranges. One of the biggest challenges with determining retirement finances is the slipperiness of the data. A researcher’s results will change based on mortality assumptions, local costs of living, updated government programs, market returns and much more. The EBRI’s study attempts to correct for that, running a model that assumed the latest version of Medicare and a large population with varying lifespans based on standard demographics.

In that context, EBRI found that, even with supplemental insurance (generally known as “Medigap” insurance), on average men will need $166,000 in dedicated savings to pay for their healthcare needs in retirement. For women, with longer expected lifespans, that number climbs to $197,000, and an average $318,000 for two-person households.

These are large numbers on their own. What makes the EBRI’s findings even more stark, however, is how they compare with how much people have in total savings.

The median household at retirement age (65 years or older) has $87,725 in total savings. This is supplemented by Social Security income, which varies and pays more to higher-earning households. Regardless of supplemental income, though, most financial experts consider this far too low to pay for the average household’s costs in retirement.

It’s also less than half of what someone will need for their healthcare spending alone.

The Role of Medicare

Much of the reason for this has to do with the Medicare program.

Medicare has a reputation for simplicity. Many, if not most, Americans believe that this is a simple universal healthcare program for retirees. Yet the reality is that this program does not, and never has, provided comprehensive health insurance. Instead, it has always been a patchwork of options focused on paying for hospital stays and the occasional doctor’s visit. Although the government has updated some parts of this program over time, such as adding partial-payment for prescription drugs through Medicare D, individual retirees have always been expected to pick up the slack.

Most households cover this through a combination of supplemental insurance, Medicaid (which, remember, is a different program) and (while uncommon) employer health insurance plans. Together, it makes for a potentially expensive network of premiums and out-of-pocket spending.

Arguably the single biggest determinant of costs is which version of Medicare someone enrolls in. The program has two versions, known as Traditional and Advantage. Traditional Medicare includes hospital stays, doctor’s visits and some drug costs (Parts A, B and D respectively). It covers fewer services, and includes more out of pocket expenses, but it’s also accepted by virtually all providers.

Medicare Advantage includes coverage that Traditional Medicare does not, such as more prescription drugs and dental coverage. It has fewer out of pocket costs than Traditional Medicare, and more caps on overall spending. However the program is also run by private insurers, which leads to lower payments and higher overhead costs, so Advantage is also accepted by far fewer providers.

For retirees who can handle the reduced choice, the EBRI found that Medicare Advantage does make a big difference in overall spending. Men enrolled in this program only need around $96,000 to meet their spending needs in retirement, while women need $113,000 on average. While this is still more than most people have in total assets at age 65, it’s significantly less than the money spent by those enrolled in Traditional Medicare.

A financial advisor can help you navigate Medicare. Get matched with with SmartAsset’s free tool.

The Big Problem

Yet no version of Medicare offers comprehensive healthcare. From drug costs to long-term care, the program has hard limits. This is why, as one Kaiser Foundation study found, around 90% of all retirees have some form of supplemental health plans in place. Low-income retirees can qualify for Medicaid, while many other retirees choose to enroll in supplemental third party insurance plans known as “Medigap.” These are health insurance programs that cover costs that Medicare typically omits, and they tend to have premiums ranging from around $130 to $300 per month.

Whatever you choose, all retirement health programs come with additional cost. Even Medicare itself requires deductibles, copays and premiums, many of which come as a surprise to retirees who expect it to provide completely free health insurance. Supplemental insurance requires out of pocket costs, most Medicaid programs require some form of patient contributions, and often a retiree will need treatment that no program covers.

It adds up, and the EBRI expects that these costs will only continue to rise. As healthcare gets more expensive, lifespans get longer and both employers and the government consider cutbacks to traditional benefits programs, many households will need to prepare for health insurance to consume more of their retirement account than ever before. Consider speaking with a financial advisor about projections and options for your retirement.

The Bottom Line

A new study by the Employee Benefit Research Institute has some hard numbers about what it will cost to pay for your health care in retirement, costs which are larger than the average retirement account altogether.

Retirement Planning Tips

• Medical expenses are, to a large degree, non-negotiable spending in retirement. So any good retirement plan should calculate exactly how much you’ll have left after paying the doctor. 

• A financial advisor will help you plan for your own retirement needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

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