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Some news on medical expenses in retirement

By Randy Neumann

A study done by Fidelity Investments found that a 65-year-old couple retiring this year will need a quarter of a million dollars ($250,000) to pay for medical expenses throughout retirement, not including nursing home care.
Drilling down into the study reveals that health care costs average $535 a month, or about 1/5 of an average couple’s total monthly expense of $2,842.  Among those surveyed, 11% said their health care costs are about $1,000 a month or higher.  Average health care costs rank second to the largest expense, food, which averages $659 a month and is slightly higher than housing-related costs, which average $494.
Fidelity surveyed 376 married individuals, 65 years and older, who are retired, to better understand their experience in financing health care needs in retirement.  The result was that almost half (47%) are paying more each month for insurance premiums and out-of-pocket health care costs than they had anticipated.
“It’s crucial that workers begin to incorporate future medical expenses in today’s retirement plans,” said Brad Kimler, executive vice president of Fidelity’s Consulting Services business.  “In the past, retirees relied on their former employers to provide health care coverage, but this is no longer something to which most of today’s retirees have access.”
Amen to that.
According to the study, over half (51%) are paying out of pocket for health care costs not covered by Medicare and 45% have bought supplemental insurance to cover the gap.  Interestingly, the 2010 retiree health care costs estimate was 4.2% higher than the 2009 estimate of $240,000, and 56% higher than it was in 2002 when Fidelity first calculated retiree health care costs at $160,000.  Wow!
So, what is one to do?  The first thing to do is to know what Medicare will cover and what it will not cover.  The second thing to do is to purchase a “Medigap” policy that covers what Medicare does not.  Let’s begin with a look at Medicare.
Medicare is the largest health insurance program in the United States.  The Social Security Act Amendment created it in 1965 as part of President Lyndon Johnson’s Great Society program. At the end of 1966, Medicare served approximately 3.9 million individuals.  According to the Kaiser Family Foundation, that number is now 45 million.
Medicare Part A is the hospitalization benefit.  You received this without paying a premium.  It does not include fees for doctors or procedures.  There is a deductible for hospitalization.  The enrollment period is a seven-month period beginning three months before your 65th birthday.
Medicare Part B covers procedures, physicians and other medical services including nursing services, X-rays, laboratory and diagnostic tests, etc.  Premiums range from $96.40 to $330.30 per month, depending on your income, including income from tax-exempt investments.
Medicare Part C, established by the Balanced Budget Act of 1997, provides Medicare beneficiaries the option to receive their Medicare benefits through private health insurance plans, instead of through the original Medicare plan (parts A and B).  Pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, “Medicare + Choice” plans were made more attractive to Medicare beneficiaries by the addition of prescription drug coverage and became known as “Medicare Advantage” plans.
Medicare Part D went into effect Jan. 1, 2006.  Anyone with Part A or B is eligible for Part D.  In order to receive this benefit, a person with Medicare must enroll in a stand-alone Prescription Drug Plan (PDP) or Medicaid advantage plan with prescription drug coverage.  These plans are approved and regulated by the Medicare program, but are actually designed and administered by private health insurance companies.
A study published by the Kaiser Family Foundation in 2008 found the Fee-For-Service Medicare benefit package was less generous than either the typical large employer PPO plan or the Federal Employees Health Benefits Program Standard Option.  What does this mean?  It means that because there are lots of gaps in Medicare coverage, you have to cover yourself with a Medigap insurance policy.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual.  Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial.  Member FINRA/SIPC.  He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.

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