Roughly 64 percent of Americans will retire broke according to a 2019 GOBankingRates survey. The survey revealed that most Americans retire with less than $10,000 saved. This is an alarming percentage considering the average couple retiring at 65 will need about $285,000 stashed away just to cover the cost of healthcare in retirement.
There are various ways people can jumpstart their retirement savings. It’s important that you not only know what to do to efficiently save for retirement, it’s also important to know the mistakes to avoid that sabotage your retirement savings.
When it comes to building a retirement nest egg, not preparing for the cost of healthcare puts your savings at risk.
What you need to know about Medicare.
Falling victim to the common misconception that Medicare is free and will cover all your medical expenses in retirement is one of the biggest mistakes you can make. It is crucial to understand how Medicare works, what it costs and how it provides coverage – because Medicare is not free and it doesn’t cover everything.
Medicare comes in four parts: Part A, Part B, Part C and Part D. Americans who have worked and paid FICA taxes for at least 10 years will get their Part A benefits (inpatient hospital benefits) without a monthly premium. However, the other parts of Medicare have cost-sharing expenses such as coinsurance, copays, deductibles and premiums. The most notable expense for Medicare is typically the Part B (outpatient benefits) premium, which is $135.50 for most Americans in 2019.
Medicare Supplemental Coverage
Because Original Medicare only covers up to 80 percent of Medicare-approved medical expenses, many beneficiaries consider Medicare supplemental coverage options.
Medicare Supplement plans (also known as Medigap) assist in covering your Part A and Part B deductible, coinsurance and copays. Whereas Medicare Advantage plans (Medicare Part C) have the potential to reduce your out-of-pocket medical costs through lower cost-sharing structures and deductibles. Most plans also include Part D prescription drug coverage, which can lower overall premium costs, as well as additional coverage for routine services not covered by Original Medicare.
Although both options are designed to bridge the coverage gaps in Original Medicare, the two plans are actually very different.
When you have a Medicare Advantage plan, your benefits come from the private insurance company who sells your plan, not Medicare. With these policies, you may need to use a provider network for all routine healthcare and prescription drugs.
If you have a Medigap plan, you are still enrolled in Original Medicare and Original Medicare serves as your primary insurance. Beneficiaries can see any healthcare provider who participates with Medicare. You have access to all Medicare providers nationwide without the need for referrals.
Health Savings Accounts
A health savings account is a triple tax-advantaged account where you can put money aside on a pre-tax basis and use that money for qualified medical expenses. Health savings accounts (HSAs) are one of the best ways to save and pay for medical expenses in retirement. In order to enroll in an HSA, you must currently have a high-deductible health insurance plan. The money deposited into your HSA is yours for life and builds tax-free by compounding and earning interest over time.
In 2019, you can contribute up to $3,500 as an individual or up to $7,000 for families and people aged 55 or older can contribute an extra $1,000 contribution every year as a catch-up contribution.
It’s extremely important to note that once you enroll in Medicare, you can no longer make contributions to your HSA. Attempting to make contributions to an HSA while on Medicare can lead to costly penalties with the IRS.
When it comes to saving for retirement and preparing for health expenses, it’s always smart to contact a professional to help you understand your options. Don’t roll the dice and take your chances when it comes to preparing for healthcare costs in retirement.