That usually gives clients peace of mind, he says, “because it clarifies the meaning of the $6,000 per year we use as an initial estimate.”
Of course, financial advisors also want to plan for their clients’ all-in cost of healthcare. At one end of the spectrum, those one in four retirees in the 25th percentile who are covered by traditional Medicare (Parts A and B) and a prescription drug plan (Part D), including out-of-pocket expenses, will pay less than $2,700 per year for annual healthcare expenses, according to Banerjee’s research. At the other end of the spectrum, one in 10 retirees—those in the 90th percentile—will spend more than $7,800 annually on total healthcare costs, the median expense being $3,500.
The Mercer-Vanguard research has different estimates, but the results are similar. It shows that a low-risk, 65-year-old woman under original Medicare, in 2020, would have median costs of $3,100 pear year, a medium-risk woman would have median costs of $4,000, and a high-risk woman would have median costs of $6,700.
Wealth advisor Jason Branning advises clients to further reduce the variability of their out-of-pocket expenses by purchasing a Medicare Supplement Insurance plan, or Medigap, typically Plan F (for those who still qualify) or Plan G.
Medigap plans cost on average $150 to $200 per month according to Kaiser Family Foundation. They can help clients cover copayments, coinsurance and deductibles copayments, says Branning, who is with Branning Wealth Management in Ridgeland, Miss.
“These Medigap plans cover a majority of the medical costs annually for retirees through their monthly premiums,” Branning says. “Our advice is to cover these mandatory costs—health insurance—by matching them to stable income.”
That stable income includes Social Security, pensions (if the clients are lucky enough to have one) and earned income (if they are still working). Branning also uses withdrawals from various taxable and retirement accounts, such as IRAs and health savings accounts (HSAs) when necessary, as well.
The Mercer-Vanguard model suggests that a typical 65-year-old woman who purchased a Medicare Supplement Plan G and a standard prescription drug plan would have annual healthcare expenses of $5,100 in 2020.
“For those who can afford it, purchasing a Medigap plan that covers most of what Medicare doesn’t pay can lead to a highly predictable healthcare budget and heavily limit out-of-pocket medical expenditures,” says Kuster. “But doing so comes at an expense. Compared to lower cost Medigap policies with potential higher out-of-pocket expenses, buying a more expensive plan also means experiencing higher premiums, even if you don’t use the plan often. It’s wise to weigh the benefits and disadvantages of other insurance options, such as a Medicare Advantage plan or any retiree medical benefits available.”
De Santis says the question about Medigap is specific to each individual. “But Medigap is a good option if someone thinks they may see a doctor frequently and are concerned about the deductibles and copays,” he says. “I think it’s a good option to evaluate with the specific client.”
To be sure, retirement healthcare costs can vary widely depending on the type of insurance a retiree chooses, and no type of coverage is “typical,” according to Banerjee.
The authors of the Mercer-Vanguard research share that opinion: “Coverages differ in cost and comprehensiveness, and retirees need to make trade-off decisions when selecting a plan,” they write. “Total costs under different Medicare coverages may vary based on health status. Some people may consider paying higher premiums to reduce the risk of extreme or less predictable out-of-pocket costs. Others, especially those who expect to remain healthy, may experience lower costs in most years by opting for a less-extensive supplemental policy or none at all. The trade-off is that they may experience years with much higher costs. Waiting until supplemental coverage is needed may not be advisable, as many carriers will not provide that option after an individual becomes sick—outside of the initial Medicare enrollment period—or will charge higher rates.”
Planning For Prescription Costs
The just-passed Inflation Reduction Act will also change how financial advisors plan their clients’ healthcare costs in retirement. The law caps out-of-pocket prescription drug costs at $2,000 annually per Medicare beneficiary starting in
2025. Original Medicare, combined with a strong Medigap and efficient Part D coverage, means less risk of unexpected out-of-pocket healthcare costs through retirement, says Kuster.