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How much might you spend on healthcare in retirement? Well, more than a few researchers have chimed in on that subject, including those at T. Rowe Price, New York Life, and Vanguard and Mercer Health & Benefits. Now AARP is weighing in.

In its report, Medicare Beneficiaries’ Out-of-Pocket Spending for HealthCare, AARP found the following:

In 2018, people with traditional Medicare spent an average of $6,168 on insurance premiums and medical services. They spent almost half of that money (47%) on Medicare or supplemental insurance premiums. The remainder was out-of-pocket spending for healthcare services that Medicare covers (26%) and for those that the program does not cover (27%).

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Of note, monthly premiums for a Plan G in 2020 ranged from $90 to $170, depending on your age and state, according to MedicareFAQ.

The amount that people with traditional Medicare spend on healthcare varies based on their health status and whether they have a chronic condition. People in fair or poor health paid an average of $2,971 out of pocket for healthcare services in 2018; the amount incurred by people in excellent or very good health was $1,956. People with Parkinson’s disease spent more on healthcare services than those with any other type of illness, an average of $3,773.

One in 10 people with traditional Medicare spent at least $10,816 in 2018 and the top quarter of spenders paid an average of $14,123.

Healthcare expenses can create a significant financial burden for many Medicare beneficiaries, with half the people with traditional Medicare spending at least 16% of their income on healthcare.

One in 10 beneficiaries spent at least 52% of their income on healthcare.

According to AARP, several factors explain why many people with traditional Medicare pay significant amounts out of pocket for healthcare, including:

Traditional Medicare does not have a limit on beneficiaries’ annual out-of-pocket spending.

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People with traditional Medicare generally pay a monthly premium for physician (Part B) coverage and for prescription drug (Part D) coverage. A small share of beneficiaries also pay a monthly premium for inpatient hospital (Part A) coverage.

Traditional Medicare requires that beneficiaries contribute to the cost of their care in the form of deductibles, coinsurances, and copayments.

Many people covered under traditional Medicare buy private supplemental insurance — such as Medigap or employer-sponsored retiree coverage — to help pay their out-of-pocket costs for Medicare-covered services.

Beneficiaries pay substantial amounts out of pocket for services and devices not covered by traditional Medicare, including hearing aids, eyeglasses, dental care, and long-term care services.

Ways to Plan for Medicare Expenses

Sudipto Banerjee, vice president of retirement thought leadership for global brand marketing at T. Rowe Price, says laying out the annual expenses separately for premiums and out-of-pocket (OOP) expenses is in line with T. Rowe Price’s approach. Also useful: the AARP report shows the expenses for people with different types of chronic conditions. “When it comes to advice, I think this type of information could be very useful,” said Banerjee.

But what would be especially helpful is this: A comparison of the total expenses for people with different chronic conditions and how that compares with the population averages.

It would also be helpful, said Banerjee, if medians are reported for these expenses instead of averages. “It sounds technical, but it makes a big difference,” he said. “Medical expenses are very different from other common household expenses. A small fraction of households has very large medical expenses and that increases the average, usually much higher than what a household in the ‘middle’ can expect.”

In addition, Banerjee said long-term care (LTC) expenses could be a big contributor to this discrepancy. “In our research we have seen that some people could spend in six-figures for LTC, but the median out-of-pocket expenses for LTC is zero,” he said. “We prefer to keep LTC expenses separate from ongoing annual healthcare expenses.”

Banerjee also noted that large healthcare expenses are usually episodic. “In our research we have seen that only a small fraction of those who experience a sudden large increase in healthcare expenses in any given year keep paying at that elevated level in the coming years,” he said.

For example, those who experienced a $5,000-plus increase in their OOP expenses during a two-year period, only 20% of them were paying at that level after two years and only 14% of them were paying at that level after four years. “However, there is a caveat here,” he said. “Many people might not survive after such an episode at old ages and will fall out of the sample. But expenses are moot at that point anyway.”

As for advice and guidance for beneficiaries, Banerjee offered the following:

  1. Medicare has several supplemental insurance options, including options to get coverage from private insurers. They all have different cost implications and some limitations. Do due diligence to figure out what works best for your situation.
  2. Long-term care expenses usually pose the biggest risk when it comes to healthcare. Try to figure out who could be in your care network, what kind of services can they provide, and then figure out if long-term care insurance makes sense for you. In making the decision, keep in mind the level of assets you want to protect as Medicaid exists as the insurer of last resort. Also, the financial health of the insurer is important, too, because many LTC insurers have left the market.