Financial Strategies for Anticipating Retirement's Medical Costs
In a recent article, financial advisor Lucas Cox recommends budgeting for health care costs in retirement by adding 5% annually to the average cost of $8,600 and incorporating that into your budget. This approach is crucial, as health care costs can significantly impact your retirement expenses.
The article, written by a contributing advisor and not the Kiplinger editorial staff, highlights the importance of understanding the various health care options available to pre-retirees. To help you compare Medicare Supplements (Medigap), Medicare Advantage, and health care exchange policies, here are key factors to consider:
Coverage Scope and Flexibility
- Medigap supplements Original Medicare by covering deductibles, coinsurance, and copayments, allowing you to visit any doctor or hospital that accepts Medicare nationwide without network restrictions.
- Medicare Advantage bundles Original Medicare benefits with additional coverage like prescription drugs, vision, and dental, but usually requires you to use a network of providers, which might be limiting, especially if traveling.
- Health care exchange plans (for pre-Medicare eligibility) offer varied coverage but may not include Medicare-level benefits and can have different networks and cost structures than Medicare options.
Cost Comparison
- Medicare Advantage plans typically have lower monthly premiums (average ~$28/month in 2025) but higher out-of-pocket costs when receiving care.
- Medigap plans generally have higher monthly premiums (Plan G averages $159/month in 2025) but lower or no out-of-pocket costs for covered services, providing more predictable expenses.
- Health care exchange premiums depend on income, subsidies, and plan choice, often with varying deductibles and copays that may be higher than Medicare Supplement costs for comparable coverage.
Out-of-Pocket Limits and Risk
- Medicare Advantage plans have annual out-of-pocket caps ($9,350 in-network in 2025) which can protect against very high medical expenses but may still entail costly copays or coinsurance for frequent care.
- Medigap policies typically cover most out-of-pocket costs, meaning less risk of surprise medical bills, beneficial for those with chronic conditions or frequent health care needs.
- Health care exchange plans have variable deductibles and out-of-pocket maxes, often higher than Medicare options depending on the plan.
Extras and Restrictions
- Medicare Advantage plans often include extra benefits such as prescription drug coverage, vision, dental, and wellness programs.
- Medigap plans do not usually cover prescription drugs; if desired, you must purchase a separate Medicare Part D plan.
- Health care exchange plans coverage for extras depends on the specific policy chosen and may vary widely.
Ease of Management and Claims
- Medigap with Original Medicare tends to have fewer claim denials and less paperwork, offering more straightforward claims processing.
- Medicare Advantage requires dealing with private plan networks and prior authorizations, which may complicate access and billing.
Planning for Pre-Retirement
For individuals not yet eligible for Medicare (under 65), health care exchange plans may be the primary option, requiring estimation based on expected premiums, subsidies, deductibles, and other out-of-pocket costs. At Medicare eligibility, evaluating transition costs is critical, including potential premium changes and coverage needs.
By considering these factors, you can estimate health care expenses both before and after Medicare eligibility, enabling a tailored, comprehensive approach to retirement planning. It's essential to remember that health care costs tend to rise faster than general inflation, so your health care spending is likely to increase at a higher rate than you may expect over a 25- to 30-year retirement.
If you retire before age 65, you'll either need to continue your employer-based coverage or sign up at HealthCare.gov (also known as Obamacare and the Affordable Care Act). It's crucial to factor health care costs into a retirement expense budget to create a more realistic idea of retirement expenses and avoid unexpected, budget-busting expenses.
[1] "Medicare Advantage vs. Medigap: Which is Better for You?" Kiplinger, 2021. [2] "Medicare Advantage vs. Medigap: Which is Right for Me?" AARP, 2022. [3] "Medigap Plans: What You Need to Know" Medicare.gov, 2022. [4] "Health Care Exchange Plans: A Guide for Pre-Retirees" Kiplinger, 2022. [5] "Medicare Advantage vs. Medigap: How to Choose" Forbes, 2022.
- As you plan for retirement, it is crucial to allocate a portion of your budget towards health care expenses, particularly considering the rising costs in retiree health care which might outpace inflation.
- In the process of finding the best health care options available during pre-retirement, one must delve into the coverage scope and flexibility offered by Medicare Supplements (Medigap), Medicare Advantage, and health care exchange plans.
- Personal finance and investing go hand in hand with health care planning for retirement; understanding the cost comparison, out-of-pocket limits and risk, extras and restrictions, and the ease of management and claims associated with each plan is vital to creating a comprehensive budget for health-and-wellness, fitness-and-exercise, and overall retirement expenses.
