Deciphering Medicare Costs in Retirement

Health care expenses for retirees can differ for a wide variety of reasons and many Medicare-eligible retirees do not have a clear understanding of how much their health care will cost, what Medicare covers, or what additional options are available.

The Milliman Retiree Health Cost Index examines the differences in Medicare coverage and projects the total premiums and out-of-pocket expenses a healthy 65-year-old can expect to spend on medical and prescription drug costs in retirement across sex, geography, and the two most common coverage options for Medicare-eligible retirees: Original Medicare plus Medigap plus Part D and Medicare Advantage Part D.

According to the report, the average 65-year-old is expected to spend well over six figures for health care over the course of their remaining lifetime. Though costs can vary, the Original Medicare plus Medigap plus Part D plan is estimated to cost $264,000 for men and $300,000 for women, while Medicare Advantage plus Part D is estimated to cost $137,000 for men and $158,000 for women.

These numbers can be a helpful starting point, but the report warns that there are more factors retirees need to consider to be financially prepared to address their health care needs during retirement.

Most people can not apply for Medicare until age 65, and if they do, they should expect their health care costs to be much higher, the report states. At age 60, a retiree should expect to pay about 53% more for health care expenses over their lifetime than if they were to wait until age 65 and enroll in the Original Medicare plus Medigap plus Part D plan. They would pay about 77% more if they were to enroll in a MAPD plan.

Delaying retirement allows retirees to save more for retirement and continue earning income and employer-sponsored benefits, including health care, the report states. At age 70, a retiree would spend about 28% less for health care expenses than at age 65 for an Original Medicare plus Medigap plus Part D plan. They would pay about 29% less if they were to enroll in a MAPD plan.

Retirees will have to take a variety of health factors into consideration as out-of-pocket costs are also an important part of retirement planning, the report states. Factors to consider include heart problems, arthritis, other chronic or recuring ailments, tobacco use or high blood pressure. Retirees should consider the level of financial risk they could incur by trading off lower premiums for higher deductibles and out-of-pocket costs.

Healthy retirees could expect to spend about 12% less on health care costs for Original Medicare plus Medigap plus Part D plans or 28% less for MAPD plans, the report states. Those with below average health can expect to spend around 18% more on health care costs for Original Medicare plus Medigap plus Part D plans or 45% more for MAPD plans.

Even without any current health issues, it is important to consider that health risk can change rapidly, the report warns. There is always a potential for increased health care spending in the later years of life, especially when faced with a chronic condition or an acute episode such as a heart attack or stroke. Retirees with health issues or are at risk for developing health issues, should consider addressing this budgeting for a below-average health status in retirement.

The report also considers life expectancy and found that living five years longer increased the amount of health care spending by about 40%, while living five years less reduces the amount spent by about 32%.