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Planning for a stable income in retirement is something most people think about regularly, but it can be easy to put off preparing for the financial realities of health care as we age.

This may be partly due to the belief that Medicare will serve as an adequate and affordable backstop for any health needs. But the federal insurance program is not one-size-fits-all, and comes with costs, limits, and gaps that need to be understood when planning for retirement.

“Everybody needs some type of medical coverage (and) there is a fair amount of complexity and filing options around Medicare,” says Griffin Geisler, a wealth planning consultant at RBC Wealth Management–U.S.

Gaps in coverage often need to be filled by private insurance or paid out of pocket, making the financial burden substantial. Unfortunately, many people don't take the necessary steps to make sure they can handle that burden.

As part of the Taking control of health care in retirement report, RBC Wealth Management surveyed more than 1,000 people on their perceptions of health care in retirement. A full 80 percent of respondents said they were worried about funding their health care expenses; however, only 56 percent said they had factored costs of care into their financial planning, and half of those who were preparing believe they may underestimate the true cost.

Understanding Medicare's coverage, as well as its limits and gaps, can be key to planning a retirement with enough savings to cover your health needs.

Medicare primer

It's easy to think of Medicare as a single program that automatically activates at age 65, but it's not that simple. Depending on the level of coverage you choose, there may be premiums, deductibles and copays that you need to plan for, says Angie O’Leary, head of Wealth Planning at RBC Wealth Management–U.S.

Medicare Part A typically has no premiums, and covers primarily short-term hospitalization, hospice and some home health care. It also has a deductible of $1,600, which must be paid by the patient, and after 60 days there are significant coinsurance charges that also need to be considered.

“On the costs, some people still think that Medicare's free,” says O’Leary. “Part A is free (of premiums), but for any of the hospitalization, supplements, drugs, or anything like that, you definitely have to pay, and (many people) are surprised at how much it does cost.”

In addition to Part A, Medicare Part B is the other major component of Medicare coverage. Preventative care and outpatient care are covered by Part B, but at the cost of a monthly premium that can range from $164 to $560, depending on the patient's income. Part B has 80/20 coinsurance (meaning 20 percent of all Medicare-eligible expenses must be paid by the patient) after the $226 deductible.

The Medicare Advantage Plan (Part C) is a separate path to Medicare coverage, similar to a PPO or HMO, and is approved by the government but run by private companies, while the Medicare Prescription Drug Plan (Part D) offers prescription drug coverage only.

But there are also a number of health-related costs not covered by any of those options, including cosmetic surgery, hearing aids and most dental care.

“Those things, even though they're not directly medical related, they kind of tie in to the broader medical discussion, and you have to make sure you either have supplemental coverage for that or you plan for those costs accordingly,” says Geisler.

Be ready for sticker shock

“When we did our survey and asked people how much do you expect to pay for health care in retirement, (respondents) came up with about $2,700 per person at age 65,” says Geisler.

However, a more realistic target for out-of-pocket expenses at age 65 is more than $11,000 for a married couple, according to a 2022 report on retirement health care costs by HealthView Services. That figure rises to nearly $40,000 for a married couple at age 85, making health care second only to housing as an expense category in retirement. The RBC report suggests the increasing costs are due to a combination of longer lifespans, higher drug costs and more surgical options to deal with issues that develop with age.

“When you start looking 20, 30, 40, 50 years out, those numbers get really big, really fast,” says O’Leary.

Also contributing to the increased need to prepare is the potential for nursing home, or long-term care, which can cost more than $100,000 annually and is not covered by Medicare.

Higher-income beneficiaries are also subject to the income-related monthly adjusted amount (IRMAA), which raises Part B and Part D premiums for those above certain thresholds.

“IRMAA's a big thing that affects more and more of our clients,” says Geisler. “We're really trying to make them aware of it and give them some ideas and strategies to help them manage their income when they're in those Medicare years to potentially mitigate some of those extra costs.”

Where you live will also affect your out-of-pocket costs as private insurance costs can vary depending on the number of available health providers in your area. In remote areas, for example, insurers may take into account the potential costs of transport and temporary accommodations in the event of a health emergency, which can raise premiums significantly.

These costs may be reduced for those 65 and older who have existing employer health-care plans. Having an existing employer plan may make it unnecessary to sign up for Part B; however, it's important to determine how your coverage works with Medicare before making the decisions about enrollment.

Be ready to file

Both Geisler and O’Leary stress the importance of doing research well ahead of the Medicare enrollment period, which begins a few months before you turn 65.

“If you don't file for Medicare and you don't fall under one of the exceptions, you could pay a significant amount of premium penalties that really don't go away and there's really no way to appeal it,” says Geisler. 

Penalties may include a 10-percent rise in Medicare Part B annual premiums each year after you turn 65, unless you are able to prove that you don't need Medicare due to private coverage.

Starting early

Given the costs involved, it can be important to prepare for retirement health care long before you actually need it. Geisler and O’Leary recommend starting as early as possible, and certainly by the time you reach your 40s.

“It's getting people to understand bigger costs,” says O’Leary. “The earlier we can talk to them the better, about how much you're going to have to save and what are the best ways to do so.”

Health Savings Account (HSA) can be a core savings vehicle, particularly with high-deductible insurance plans. HSAs allow savers to contribute up to $7,300 per year that grows tax-free and may also be withdrawn tax-free if used for qualifying medical expenses.

“If you can build up that balance in your 40s, you can see significant benefit from compounding that over a 20-year period,” says Geisler.

There's also the flip side to saving more, which is trying to limit eventual costs by exercising and watching your diet beginning in middle age, or younger. If lacking motivation, there's always the appeal of saving money in retirement that could be used better in other ways.

“Just by taking care of yourself, you can lower potential out-of-pocket costs,” says Geisler. “If you can do that, combined with savings and earmarking some funds for future health care expenses, I think that's a good recipe.”

Read more from our RBC Wealth Insights report Taking control of health care in retirement



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