Medicare Costs Are Rising. Here’s How to Prepare

Late last year, seniors on Social Security got some great news — their benefits would be getting a 5.9% increase, representing their largest raise in decades. But that good news was quickly dashed by a follow-up announcement — that Medicare Part B premiums would be rising substantially in 2022, thereby wiping out a chunk of that cost-of-living adjustment.

Medicare hikes are by no means an anomaly. But over the years, the cost of healthcare under Medicare has been growing increasingly expensive, putting a huge burden on seniors who get the bulk of their income from Social Security in particular.

In fact, new data from the Employee Benefit Research Institute reveals that based on 2021 data, a 65-year-old man needs $79,000 in savings for a 50% chance of having enough money to cover Medicare premiums and median prescription drug costs. A 65-year-old woman, meanwhile, needs $103,000.

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And that’s just for a 50% chance of being able to cover necessary healthcare costs. For a 90% chance, a 65-year-old male needs $142,000 and a 65-year-old woman needs $159,000. These figures are 9% higher than they were in 2020.

If you’re worried about keeping up with Medicare costs in retirement, there are steps you can take to make them more manageable. Here’s what to do.

1. Don’t rely solely on Social Security

Social Security pays the average senior $1,657 a month. But that may not be enough to cover your healthcare costs plus your various remaining living expenses. That’s why it’s a good idea to come into retirement with a robust nest egg. If you contribute $500 a month to an IRA or 401(k) plan over a 30-year period, and your investments in that account deliver an average annual 8% return (which is a bit below the stock market’s average), you’ll end up with about $680,000.

2. Fund a health savings account

Not everyone is eligible for a health savings account (HSA). To qualify, you must be enrolled in a high-deductible health insurance plan. But if you’re eligible, the money you put into an HSA won’t expire on you like flexible spending account funds will. And so you’ll have the option to invest HSA funds you don’t need immediately and carry your balance into retirement, where it can serve as a dedicated source of medical savings.

HSA withdrawals, like Roth IRA and 401(k) withdrawals, can be taken tax-free as long as they’re used to cover qualified healthcare expenses. And while you can’t contribute to an HSA once you’re enrolled in Medicare, you can access your existing HSA funds to pay for Medicare expenses, whether it’s premiums, deductibles, or copays.

Medical care is a burden for many seniors, and that extends to those who are relatively healthy. If you want to avoid a financial crunch later in life, it pays to read up on Medicare to see what costs you may be in line for. At the same time, it’s a good idea to have income available outside of Social Security to make those costs more manageable, and to take advantage of a health savings account if you qualify.

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