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Managing Medicare's Costs

How to estimate how much you will pay for health care in retirement

In a 2013 survey sponsored by Fidelity Investments, more than 1,800 people between the ages of 55 and 64 were asked to estimate how much their health care would cost them in retirement. They answered that it would cost $50,000, on average. All of the survey’s respondents had investable assets of $100,000 or more, which meant they were not likely to rely on Medicaid to help pay for their health care.

That $50,000 estimate is way too low, though, according to experts, with the real cost being more than twice as much. But whatever the average cost of health care in retirement is, it does not apply to most individuals. Women will pay more than men for health care during retirement. People who live in the Northeast will pay more than those who live in the Midwest. Individuals in good health will pay less than people who have serious chronic diseases. And those who qualify for Medicaid may pay little or nothing for health care.

Since averages aren’t a good way to estimate what you will pay, you might want to do your own personalized estimate. Using a shortcut explained below, you can fairly quickly project how much you will pay for health care over the next 15, 20, 25, or even 30 years.

In some cases a personalized estimate can be a wake-up call. It helps you to understand the importance of controlling your health care costs. It could also encourage you to switch a less expensive kind of supplemental coverage during the next open enrollment period. And it might even prompt you to monitor your expenses so that you know whether you’re staying on track. If your estimate assumes that your costs will increase by about 4% a year but instead they are climbing at a 6% rate, you should understand why.

A personalized estimate is based on your local cost of healthcare. Consequently it should do a better job of predicting your costs than an estimate based on national averages. If you live in a high-cost state like New Jersey, Florida, Louisiana, New York, or Texas, the five states with the nation’s highest spending per Medicare enrollee, your premiums and co-payments will be one-third more than if you live in Montana, Hawaii, Idaho, North Dakota, and New Mexico., the five lowest-cost states.

Also, some published estimates are for couples. If you’re single that may leave you wondering whether you should divide the couples number by two or use some other formula. Fidelity’s most recent estimate, for instance, is that a 65-year-old couple who do not have an employer retiree plan will average paying $245,000 for retirement health care. And though it’s generally understood that women will pay more for health care than men because they live longer, it’s not clear by how much.

In its estimate Fidelity assumes that the husband will live to age 85 and the wife to age 87. But if you’re a 65-year-old single man, it might be helpful to see an estimate based on your average remaining life expectancy. Many published estimates, of course, do distinguish between men’s and women’t costs. An example is Health View Services, which produces health care cost projection software, which estimates that a 65-year-old woman will pay $21,578 more for health care than will a man of the same age.

Even though women typically spend more for health care in retirement than women do, women’s annual health care costs are usually lower than men’s, at least until women are in their 80s. But women in their 60s and 70s have fewer expensive medical treatments than do similarly aged men. Two-thirds of all coronary bypass operations are performed on men, as an example. For that reason Medigap premiums are higher in most states for men than for women.

Still, women’s longer life expectancies and higher medical costs in later retirement more than offset the savings in their annual costs in early retirement. And so if you were estimating how much a man would pay over the next 10 or 15 years, it would likely be more than a woman would pay over the same period.

Along those same lines, a personalized estimate gives you the ability to look at different time frames. How much will your health care likely cost you over the next 15, 20, 25, and even 30 years? Published estimates assume that you live to a certain average age, but how much will it cost you if you live several years longer?

Vanguard has an online estimator that shows you the odds of living to any age that you specify. This online estimator says that a 65-year-old man has a 6% chance of living 30 more years (to age 95) and a 65-year-old woman has a 13% chance of doing so. There’s also an 18% per cent chance that at least one of them will live that long.

Another variable that can make published estimates inaccurate is the type of supplemental insurance you have. The Employee Benefits Research Institute assumes in its estimates that a retiree has Medigap Plan F, the most expensive type of supplemental coverage. But someone in relatively good health enrolled in a Medicare Advantage plan may spend tens of thousands of dollars less during retirement than they would with Plan F.

Here is a two-step process for estimating your future health care costs:

1) Select the rate at which you think your costs will grow. A reasonable assumption is 4%, which is the rate the Medicare trustees use to make their long-term projections. Then estimate how much you paid for your health care last year. If you’re not sure how much you spent in co-payments, call your insurance company to find out. Then add the plan’s premiums and your Part B premium to your co-payments.

Use the same approach if you have a Part D plan – call the plan to find out how much you paid in cost-sharing last year and then add the premiums. And if they’re not included in your other co-payments and premiums, you may also want to add what you paid for dental and vision care, hearing aids, and over-the-counter drugs.

2) Using this estimate, you can project what you will pay over the time periods you choose.
You can multiply last year’s costs by the numbers below to estimate how much you will pay over various periods. As an example, if you want to estimate how much you will pay over a 15-year-period, multiply last year’s costs by the number 20. That means if you spent $3,000 for health care last year, you will spend roughly $60,000 over the next 15 years (20 × $3,000), assuming that your costs grow about four percent a year.

For 15 years, multiply last year’s costs by 20
For 20 years, multiply last year’s costs by 30
For 25 years, multiply last year’s costs by 42
For 30 years, multiply last year’s costs by 56

If your health care costs were $3,000 last year, here’s how much your estimated costs will be over the following time periods:

15 years — $60,000 ($3,000 × 20)
20 years — $90,000 ($3,000 × 30)
25 years — $126,000 ($3,000 × 42)
30 years — $168,000 ($3,000 × 56)

If you know how to operate a pocket calculator and want to use different rates of health care inflation, you can readily look at other scenarios. But before choosing a low rate for health care inflation, remember that most people’s medical costs accelerate in later retirement. That’s when they are most likely to take additional prescription drugs and use more medical services. So your costs may increase slowly in early retirement – say at an average annual rate of 3% — but then jump to 5% rate in later retirement. ◊◊

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