Even with Medicare, you'll need about $150K for out-of-pocket health care costs. Here's how to get there – The Arizona Republic


Health costs haven’t led the charge of this latest inflation surge. Food, gasoline, cars and other items have risen much more swiftly over the past year or so.
Still, health expenses pose a chronic challenge. A married couple turning 65 this year should figure on about $315,000 combined in out-of-pocket costs over the rest of their lives, according to Fidelity Investment’s latest retiree health care estimate. That excludes what’s paid by Medicare, the federal insurance program for people 65 and up.
“Many people assume Medicare will cover all your health care costs in retirement, but it doesn’t,” said Steve Feinschreiber, a Fidelity senior vice president. “We estimate that about 15% of the average retiree’s annual expenses will be used for health care-related expenses, including Medicare premiums and out-of-pocket expenses.”
According to a Fidelity survey of more than 2,000 adults, Americans in general think a married couple retiring this year will face about $41,000 in out-of-pocket expenses over their remaining lifetimes.
Instead, the estimate pegs it at $315,000 for a married couple, $150,000 for a single man or $165,000 for a single woman. The $315,000 figure is up from $300,000 in 2021 and $160,000 in 2002, when Fidelity began its study.
“Health care is an overlooked and underestimated part of retirement planning,” said Maureen Wright, a certified financial planner at Savant Wealth Management.
Medicare pays for a lot of expenses, but not everything. The Fidelity estimate assumed that retired couples are enrolled in Medicare’s Part A, B and D programs. Part A provides basic hospitalization insurance and other services including skilled nursing and home health care, while B covers outpatient services, doctor visits, lab costs, screenings and so on. Part D pays for prescription drugs.
Part A covers medically necessary nursing home care but not long-term care that assists people with bathing, eating and other custodial activities. Long-term care can significantly drive up retiree health costs.
Many retirees opt for Part C Medicare Advantage insurance that covers hearing, dental, vision and other services, and some choose various supplemental coverages from private insurers that pay for deductibles and other out-of-pocket expenses.
Medicare is a complicated program, and there are many misconceptions about it. People are eligible for the program at age 65, but many Americans apparently think they can start coverage at age 62, confusing it with Social Security, Fidelity said.
Medicare, like Social Security, also faces various funding challenges that could reduce or otherwise alter the types of coverage for retirees in future years. 
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Premiums vary. Part A is typically provided at no added cost for people who have paid Medicare payroll taxes for at least 40 quarters, said Brian Knabe, another Savant Wealth certified financial planner. Typical participant expenses average $170 a month for Part B and $42 for D, he said.
Because premiums for Part B and D rise for participants with higher incomes, retirees might want to manage their income such as withdrawals from Individual Retirement Accounts to minimize these costs, Knabe added.
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Premiums also vary for the Medicare Advantage Part C programs provided by health insurance companies, depending on the types of coverage and other specifics. Premiums for Part C average about $33 a month. And there are various supplemental plans offered by insurance companies that pay deductibles and other costs, averaging around $163 in monthly premiums.
Retirees have several ways to pay for these and other medical costs, from personal savings in traditional bank accounts to Individual Retirement Accounts and workplace retirement programs. Some people downsize and use some of their housing equity.
Some insurance companies cover custodial long-term care, but Wright said she considers these policies expensive, reflecting the often-steep costs associated with chronic care. Some life insurance policies include long-term care coverage that, if used, decreases the value of the death benefit, she said.
One strategy deserves special attention —that focused around Health Savings Accounts that are available to millions of workers through their employers. These accounts offer triple tax benefits. Worker contributions go in pre-tax, account balances grow tax-deferred and withdrawals come out tax free if used for qualifying health expenses.
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Qualifying expenses include a range of products and services such as prescription drugs, dental visits, glasses, nursing home stays, home health care and Medicare premiums. Withdrawals may be used for non-health costs, but those distributions are taxed. If you’re below 65, non-qualified withdrawals also are subject to a 20% penalty.
HSAs are available to millions of employees as a benefit, but generally only workers who sign up for high-deductible health insurance plans are eligible. In some cases, HSAs are available outside of the workplace, according to Fidelity.
The key step is to get started with a plan, then max out contributions if you can. Individuals may invest up to $3,650 a year in an HSA, and families can contribute up to $7,300. People ages 50 and up can put away another $1,000 in catch-up contributions.
Account owners should try to use withdrawals to pay for allowed medical expenses, so that disbursements remain tax-free. If you must use money to pay for non-health expenses, delay doing so until age 65 or later, to avoid the 20% penalty.
A good strategy, especially for working adults, is to invest HSA contributions in stock market funds and the like for long-term growth while paying current health expenses from other sources of income or savings, Wright suggested.
Investing HSA funds is an overlooked benefit, said Fidelity, which offers many tips for using the accounts. In the survey, 51% of respondents didn’t know that HSA funds can be invested instead of merely parked in money-market funds.
Nearly as many respondents, 44%, incorrectly assumed that funds accumulating in an HSA must be used each year. A use-it-or-lose feature applies to flexible savings accounts, another workplace benefit, but not to health savings accounts.
If anything, balances in health savings accounts should be left to grow for many years if not decades to make a dent in those imposing medical costs that await retirees.
Reach the reporter at russ.wiles@arizonarepublic.com.

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