The biggest retirement expense you may not be ready for

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Even with Medicare, medical costs could put you at risk of outliving your savings. Here's how to prepare for future out-of-pocket healthcare expenses.
"You could call healthcare the biggest retirement expense people fail to plan for," says Ben Storey, director, Retirement Research & Insights, Bank of America. "Many folks just assume Medicare is going to pay for everything but, in reality, it only covers about two-thirds of your costs," he adds.
Premiums, out-of-pocket expenses and critical services not covered by Medicare can deplete your retirement savings. In fact, a healthy 65-year-old couple who retire in 2023 will likely use nearly 70% of their lifetime Social Security benefits to cover their medical costs in retirement.Footnote 1 Yet only about half of Americans surveyed by the Harris PollFootnote 2 said they understood how much they need to cover healthcare costs in retirement.
Many folks just assume Medicare is going to pay for everything, but in reality, it only covers about two-thirds of your costs.
— Ben Storey,
director, Retirement Research & Insights,
Bank of America
"Retirees counting on Social Security to supplement their retirement income are often surprised to learn that most of it may need to be used for healthcare," notes Storey. "Estimating and saving for those costs can help you preserve your income in retirement." Consider these five questions as you work to develop a plan to address your retirement expenses.

How much could medical expenses cost me in retirement?

Premiums, copays and deductibles can add up. Healthcare costs have been increasing at one-and-a-half to two times the rate of inflationFootnote 3 — a 55-year-old couple today could expect to pay more than $930,000 for healthcare costs during their retirement.Footnote 4
"Such a large amount may put you at risk of outliving your retirement savings," notes Storey. As you save for retirement, it's a good idea to explore what Medicare does — and doesn't — cover, estimate how much you may need to put aside for future healthcare costs and develop a plan to help you get there. "As you estimate your potential costs, consider factors such as your current health, your family's health history, where you'll retire (medical costs can vary across the country) and whether your employer offers retiree health coverage," says Storey.

What does Medicare cover, and how much does it cost?

Medicare Parts A and B, known as Original Medicare, cover a portion of hospital stays and medical services — but not vision, hearing or dental care; prescription drugs; or medical care outside the U.S. So, you may want to add a drug plan (Medicare Part D) and a Medicare Supplement Insurance Policy, commonly known as Medigap, which can help cover out-of-pocket costs as long as you have original Medicare. Medicare Advantage, or Part C, is a private insurance alternative that bundles much of that coverage but often restricts you to a limited network of providers.
While Medicare Part A is typically premium-free, you will pay monthly premiums for Part B, some Part C Medicare Advantage plans, Part D prescription coverage and Medigap. "Weighing these options is an important decision as you approach retirement," notes Storey.

Medicare plans at a glance

What the five major types of Medicare plans cover and how your costs can vary
Medicare plan Coverage Out-of-pocket costs
Part A
 (Hospital insurance)
Inpatient hospital, skilled nursing, home healthcare, hospice care Deductibles, coinsurance and copays
Part B
 (Medical coverage)
Doctors' visits, outpatient care, other medical services Monthly premiums, deductibles, coinsurance and copays
Part C
 (Medicare Advantage)
Private alternative to Parts A, B and D, plus optional benefits; network limits common Variable costs determined by insurer
Part D
 (Prescription drugs)
Brand name and generic drugs Monthly premiums, deductibles, coinsurance and copays
Medicare Supplement Insurance
Paired with Parts A and B to help with some of the costs those plans don't cover Monthly premiums

What if I retire before I'm eligible for Medicare at age 65?

Unless your employer offers retiree coverage, you'll need to consider alternate options. You could stick with your employer's insurance plan under COBRA (the Consolidated Omnibus Budget Reconciliation Act) for up to 18 months, but your premiums will be considerably higher than they were. Other possibilities could include coverage under a spouse's plan or buying coverage through the health insurance marketplace or a private insurer.

What about my future long-term care needs?

Even with all the medical coverage available through Medicare, there's one element that falls through the cracks: long-term care. Someone turning 65 today has a nearly 70% chance of requiring some type of long-term care during their lifetime.Footnote 5 Considering that a private room in a nursing home can cost upward of $100,000 per year,Footnote 6 "savings can get eaten up pretty quickly," notes Storey. "Long-term care insurance can help improve the chances that your savings will last through your full retirement."
Long-term care insurance can help improve the chances that your savings will last through your full retirement.
— Ben Storey,
director, Retirement Research & Insights,
Bank of America
However, time is of the essence. "If you have not purchased it by the time you're in your 60s, the premiums on traditional long-term care policies may be out of reach," Storey says. "Other options to consider include hybrid life insurance/long-term care policies, which are designed to provide long-term care coverage as well as cash value you could tap. In addition, some life insurance policies have a long-term care rider that can provide coverage. For those who find they can't afford to pay for the long-term care they need, Medicaid is available to help cover the costs; income eligibility requirements vary from state to state. "The sooner you consider your needs, the more options you will have."

Are there other ways to prepare for healthcare costs in retirement?

You could simply increase the amount you save in your 401(k) or other retirement accounts. "But a health savings account (HSA), with its potential tax advantages,Footnote 7 is a particularly powerful way to save for medical expenses," says Storey. With an HSA, you won't owe income taxes on your contributions, earnings grow tax-free, and withdrawals for qualified medical costs are tax-free.
To qualify for an HSA, you must have a high-deductible health plan, and you can't be covered by any other medical plan or be enrolled in Medicare. Opening an HSA could help you accumulate critical additional funds to pay for eligible expenses in retirement, including long-term care services and insurance premiums. Once you enroll in Medicare though, you can no longer contribute to your HSA but you can use the funds you've saved to cover most out-of-pocket medical expenses and Medicare premiums (Medigap Supplement Insurance premiums are an exception).
Either way, "the more you can earmark for healthcare as you save for retirement, the better," Storey sums up. Doing so is good for your financial health in retirement.

Next steps

Footnote 1 HealthView Services, "Medicare and Social Security COLAs: Putting the 2023 Numbers into Context," October 2023

Footnote 2 The Nationwide Retirement Institute, "2022 Health Care Cost in Retirement Survey," October 2022

Footnote 3 HealthView Services, "2022 Retirement Healthcare Costs Data Report," March 2022

Footnote 4 HealthView Services, "2022 Retirement Healthcare Costs Data Report, March 2022

Footnote 5 U.S. Department of Health and Human Services, "How Much Care Will You Need?" 2020

Footnote 6 Genworth, "Cost of Care Trends and Insights," 2022

Footnote 7 You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax, unless an exception applies. Any interest or earnings on the 411 assets in the account are tax-free. You may be able to claim a tax deduction for contributions you, or someone other than your employer, make to your HSA directly (not through payroll deductions). In addition, HSA contributions may reduce your state income taxes in certain states. Certain limits may apply to employees who are considered highly compensated key employees. Bank of America recommends you contact qualified tax or legal counsel before establishing an HSA.

Long-term-care insurance coverage contains benefits, exclusions, limitations, eligibility requirements and specific terms and conditions under which the insurance coverage may be continued in force or discontinued. Not all insurance policies and types of coverage may be available in your state.

Life insurance policy guarantees are backed by the claims-paying ability of the issuing insurance company. They are not backed by Bank of America, Merrill or its affiliates, nor does Bank of America, Merrill or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company.

This material should be regarded as educational information on Medicare and healthcare costs and is not intended to provide specific healthcare advice. If you have questions regarding your particular situation, please contact your healthcare, legal or tax advisor.