The biggest retirement expense you may not be ready for

“YOU COULD CALL HEALTHCARE the biggest retirement expense people fail to plan for,” says Ben Storey, director, Retirement Research and 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 2022 will likely use 71% of their lifetime Social Security benefits to cover their medical costs in retirement.¹ Yet only 52% of Americans 55 and older surveyed recently by Civic Science² said they were actively making plans for these costs.

“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. “Your financial advisor can help you estimate and develop a strategy to save for those costs.” Consider these five questions as you work together to develop a plan to help you cover all of your retirement expenses.

Premiums, copays and deductibles can add up. It’s estimated that the average 65-year-old couple who retires in 2022 will need about $315,000 to cover out-of-pocket medical expenses in retirement — and the costs of most dental services, over-the-counter medicines and long-term care are not included in that figure.³ What’s more, healthcare costs have been increasing at one-and-a-half to two times the rate of inflation⁴ — a 55-year-old couple today could expect to pay more than $930,000 for healthcare costs during their retirement.⁵

Such a large amount may put you at risk of outliving your retirement savings, notes Storey. Your advisor can walk you through what Medicare does — and doesn’t — cover, estimate how much you may need to save for future healthcare costs and develop a plan to help you get there. As you estimate your costs, says Storey, 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.

Deciphering the alphabet soup of Medicare parts A, B, C and D isn’t easy. See the chart below for an overview of what’s covered and how supplemental plans can help.

With so many options to choose from, many retirees end up purchasing more coverage than they need.⁶ Weighing these options is an important decision as you approach retirement, notes Storey. You’ll be automatically enrolled in Parts A and B when you turn 65 if you’ve already begun claiming Social Security. But if you’re still working and covered under an employer’s plan at that age, you might want to consider opting out of Plan B and avoiding those premiums until you need the coverage.

Premiums, which are set annually, are tied to your modified adjusted gross income — something to keep in mind if you’re thinking of a taxable Roth IRA conversion or a sale of highly appreciated stock options in a single year. Your financial advisor can provide insights on how these options might have an impact on your income, says Storey. For more specifics about coverage, costs, information on deadlines and where to sign up, visit medicare.gov.

Unless your employer offers retiree coverage, you’ll need to consider alternate options for staying covered until Medicare kicks in. 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 include coverage under a spouse’s plan or buying coverage through the health insurance marketplace or a private insurer.

Even with all the medical coverage available through Medicare, there’s one element that falls through the cracks — the cost of long-term care. Someone turning 65 today has a nearly 70% chance of requiring some long-term care during their lifetime.⁷ Considering that a private room in a nursing home can cost upward of $100,000 per year,⁸ “savings can get eaten up pretty quickly,” notes Joe Justice, managing director, retirement product executive, Bank of America. “Long-term care insurance can help improve the chances that your savings will last through your full retirement.”

But here’s the rub: If you haven’t purchased it by the time you’re in your 60s, the premiums on traditional long-term care policies may be out of reach. 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. The sooner you consider your needs, the more options you’ll have, says Justice.