Here's the good news about health care in retirement: 94% of Medicare beneficiaries age 65 and up are satisfied with their quality of care.1 The not-so-good news? The government health insurance program doesn't cap costs, potentially exposing many retirees to higher-than-expected out-of-pocket expenses.
Indeed, a couple with average Medicare premiums and out-of-pocket expenses may need between $212,000 and $318,000 in savings to cover their health expenses throughout retirement, according to an analysis by the Employee Benefit Research Institute.2
Then again, Medicare was never intended to cover all health care services. Introduced in 1965, the program offered basic insurance to retirees who otherwise lacked coverage. Over the years, Congress has greatly expanded the pool of eligible participants, but Original Medicare still covers only certain services, including hospital stays (under what's known as Part A) and outpatient medical care (under Part B). Services outside its scope—including routine dental and vision care, prescription drugs taken at home, and long-term care—must be paid out of pocket or via a separate private insurance policy.
To complicate matters, Medicare isn't retirees' only option. Private insurance policies, known as Medicare Advantage plans (a.k.a. Part C), cover the same services as Original Medicare, generally include prescription drug coverage, and cap out-of-pocket expenses. (Some plans also offer additional coverage, such as dental and vision.) But these plans have drawbacks, including limited provider networks and a higher incidence of coverage denial.
"Choosing the right Medicare coverage is critical because it affects the doctors you'll see, the hospitals you'll go to, and the costs you'll pay out of pocket—often over the remainder of your lifetime," says Chris Kawashima, CFP®, a senior research analyst at the Schwab Center for Financial Research. "To maximize coverage and minimize out-of-pocket costs—which can be substantial—there are really just two main options."