Health-care expenses are one piece of the household budget that increases with age. In fact a recent government report found that housing expenses — the largest slice of a household budget — decline with age in retirement, as do transportation, clothing, and entertainment.

While difficult to estimate, health-care expenses have become more prominent in retirement planning. Preparing for adequate insurance coverage is important. Many individuals realize that while Medicare covers most Americans beginning at age 65, it does not pay for everything.

With deductibles and co-pays that could add up to significant out-of-pocket expenses, many retirees might consider buying supplemental health insurance to cover these costs.

For supplemental coverage, the Medicare system has two options: Advantage Plans and Medigap policies.

Medicare Advantage Plans are private plans that bundle together Medicare Parts A, B, and often D, and typically offer additional benefits such as vision, dental, and hearing. Some Medicare co-payments and deductibles are eliminated, and there are also limits on annual out-of-pockets expenses (with a cap of $6,700 per year). Most plans offer coverage through a health maintenance organization (HMO) or preferred provider organization (PPO). HMO plans generally require the use of health-care providers within the plan’s network. PPO plans do not require that you see in-network providers or obtain a referral to consult a specialist.

Medigap policies are also offered by private insurance companies and cover certain expenses such as deductibles, co-pays, and uncovered services. Premiums vary depending on the area and type of plan, and are paid separately from Medicare Part B premiums. Medigap policies do not usually offer prescription drug coverage.

Consider enrolling in Medigap at age 65 because you cannot be charged a higher premium based on your health situation. If you enroll later, you may be charged a higher premium if you have certain pre-existing health conditions.

To understand the basics about Medicare, issues around enrollment, and supplemental coverage, review Putnam’s education article, “Three key things to understand about Medicare.” And discuss expenses and insurance with a financial expert for guidance on the optimal choices for your individual situation.


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