March 21, 2023


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What people forget about Medicare, according to financial planner

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  • If you’re 10 years away from retirement, it’s important to start thinking about how you’ll cover your healthcare costs.
  • My clients often wrongly believe that Medicare will cover most, if not all, of their expenses. But Medicare is actually a lot like Swiss cheese: full of holes.
  • If you’re nearing retirement, you’ll want to plan for coverage of your eyes, ears, and teeth, as well as long-term care. You can also expect to pay some copays and coinsurance.
  • Use Blooom to analyze your 401(k) today and see how you can grow your retirement savings »

You work your entire life, you pay 1.45{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} of all your earnings into Medicare, and you retire believing any and all healthcare costs are free once you reach age 65. Unfortunately, this isn’t the case, and not accounting for these costs will likely have a detrimental financial impact on your retirement. 

To understand how great the potential impact may be, let’s review what Medicare does and doesn’t cover, and what the actual cost is when someone retires. 

What Medicare actually covers

Medicare was once described to me as a piece of Swiss cheese: There are a lot of holes everywhere. This is a very apt description. Medicare has different parts that cover different care, including Parts A, B, C, and D. There are also certain things that aren’t covered for which you may need to buy additional insurances; more on that later. 

What Medicare Part A covers

Part A is the “free” part of Medicare, and it is really only free if you paid into the system over your lifetime. This is the program that our 1.45{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} Medicare tax funds. If for some reason you never paid into the system, or are ineligible for another reason, your Part A premiums would be either $252 or $458 each month ($259 or $471 in 2021).

So, what do we get for that 1.45{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} tax or the monthly premium we pay? Hospital, hospice, home health, skilled nursing facility, and nursing home care. However, and this is a big one, the skilled nursing and nursing home care is not coverage for custodial-type care, i.e. the care most people need for long-term care. 

The coverage that is provided by Medicare for custodial care, when you cannot complete at least two activities of daily living, like bathing and toileting, is extremely limited. The first 20 days are fully covered, followed by a period of coinsurance where costs are shared, and then followed by a period where 100{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} of the expenses fall on the patient. The average cost of a nursing home facility in the United States for a semi-private room is $7,513 per month, so you can imagine how quickly costs add up if you need care for two to three years. 

What Medicare Part B covers

Part B covers doctor care, specifically medically necessary and preventive services, and this isn’t free. Your monthly premiums will range from around $140 to almost $500, depending on your income, and they increase each year to account for inflating medical costs. 

Most people with Part A and Part B coverage will feel like they are fully covered for any medical needs they may have, but they aren’t. Part B only covers 80{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} of those charges. This leaves people paying 20{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} coinsurance without any limit, meaning if you have $1,000,000 in Part B charges, you will personally be on the hook for $200,000. 

Thankfully, we can cover this hole in the swiss cheese with a Medigap policy. These policies are sold by private insurance companies and their premiums and deductibles vary widely, as does what they cover, but all of them cover most, if not all, of the Part B coinsurance.

What Medicare Part D covers

Next up in our retirement health-care spending spree is our monthly Part D premiums, which, like Part B premiums, increase with your income. They range from approximately $30 a month up to $110 monthly, and total cost, including deductibles and copays, will depend on what medications you take. Medicare offers a great tool when shopping for these plans, which can be viewed here.

Parts A, B, and D are sometimes referred to as Original Medicare, and most people choose to insure themselves using these different parts. However, there is an alternative, which is called Part C, or Medicare Advantage. 

What is Medicare Part C, or Medicare Advantage?

Medicare Part C plans are sold through private insurance companies and provide all of the coverage offered through A/B/D, and sometimes at a lower cost. The only potential issue some might find with the Advantage plan is that it is very network specific. So if you like your local doctor and hospital and aren’t looking for a specialist in a different state, this plan may be for you. Keep in mind, though, while it may be cheaper than Original Medicare, it is not in fact free. 

What about long-term care coverage?

So, most of the holes in our swiss cheese have been filled, but we still have one gaping hole remaining and a few smaller ones, too. The gaping hole is the lack of long-term care coverage, which we’ve seen is expensive. According to the National Care Planning Council, the average nursing home stay is 835 days. If someone has a long-term care need, and it hasn’t been accounted and planned for, it will likely decimate any retirement assets they have managed to save. 

We recommend clients speak with their spouse and family and discuss who might take care of them if the need arises. If nobody is available to provide care, there are a few options to consider, including purchasing long-term care insurance, saving extra money to self-insure (pay out of pocket for the costs), or planning to spend down any retirement savings and allow Medicaid to cover any future costs. These are all viable strategies and some make more sense for some than others. Importantly, though, none are free. 

Don’t forget coverage for eyes, ears, and teeth

Finally, only a few small holes remain, and our medical insurance plan in retirement is almost complete. The last things we need to account for are those healthcare services that we will most likely need as we age but aren’t covered: dental care, eye exams, dentures, and hearing aids. These will all have to be paid out-of-pocket and most can be expensive. Hearing aids can cost $5,000, and we all know how quickly dental-care costs can increase when a random toothache leads to a root canal. 

Every individual has a different situation and their healthcare costs in retirement will be specific to them, but I can say with complete confidence that it will not be free.

Charles Weeks is the founding partner of Barrister, a registered investment advisor.