Financial Advisor's Handbook on Preparing for Retirement Medical Costs

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As you approach retirement, understanding your health care expenses is crucial for a successful financial plan. Here's a breakdown of the key factors to consider when comparing Medicare Supplements (Medigap), Medicare Advantage, and health care exchange policies.

Medicare Supplements (Medigap) are add-on policies to Original Medicare (Parts A and B) that help cover out-of-pocket costs. They offer unlimited access to any provider accepting Medicare nationwide, making them ideal for people with ongoing health issues who want predictable costs and broad provider choice. However, they generally have higher monthly premiums.

On the other hand, Medicare Advantage (Part C) plans bundle Original Medicare benefits with extra features like prescription drug coverage, dental, vision, and hearing. They usually have lower monthly premiums but require you to use network providers, often need prior authorization for specialist care, and have annual caps on out-of-pocket spending.

Health care exchange policies (through the Affordable Care Act marketplaces) are generally designed for individuals under 65 and those not yet eligible for Medicare. Once you are eligible for Medicare at 65, exchange plans are typically not an option or not suitable, because Medicare is the primary insurer after 65.

When comparing these options, key factors to consider include provider access, monthly premiums, out-of-pocket costs, extra benefits, flexibility, claim denials, and suitability.

According to a Jackson study, nearly two-thirds of pre-retiree investors underestimate their expected health care retirement costs. The average retirement health care cost per person is $8,600 a year. Understanding and factoring health care costs into retirement expense budgeting can help create a more realistic idea of retirement expenses.

It's important to note that health care costs tend to rise faster than general inflation. By 2055, the annual health care cost per person (excluding long-term care) is projected to be $32,806, based on a 5% annual increase.

Retirement health care expenses can be divided into five common categories: premiums, deductibles, cost-sharing or copays, out-of-pocket costs, and long-term care expenses. The cost of annual medical expenses in retirement increases annually due to inflation and the higher cost of health care inflation.

Premiums for an individual insurance policy on the ACA Marketplace run on average between $800 and $1,200 a month for someone age 62 to 65. A good rule of thumb is to add 5% a year to the $8,600 figure for budgeting purposes.

The earlier you retire before Medicare eligibility, the more your health care costs will increase. Medicare eligibility begins at 65. Living even five years longer than your targeted life expectancy will increase your health care spending by 42%.

When planning for retirement health care expenses, it's essential to weigh the pros and cons of each policy option to find the one that best fits your individual health needs, budget, and expected use of medical services.

Remember, this article was written by a contributing adviser and presents their views, not those of the Kiplinger editorial staff. Always consult with a financial advisor for personalised advice.

[1]: Source: Medicare.gov [2]: Source: Healthcare.gov [3]: Source: Jackson National Life [4]: Source: AARP.org (for Medigap coverage of overseas emergencies)

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