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Empower employees today

Many people don’t plan for the cost of their health care needs in retirement, which can add up to hundreds of thousands of dollars. Even with Medicare, retirees could pay thousands a year in premiums with no dental or vision coverage, plus deductibles, copays and coinsurance. And medical costs typically rise faster than inflation.

Here are three things your employees should know about health care costs in retirement.

PayFlex Engage     Three things your employees should know about health care costs in retirement 


Helping your employees better prepare for health care costs in retirement may seem like a tall order. But it’s a very important objective because worry over finances is the number one cause of stress among employees, according to PwCs 9th Annual Employee Financial Wellness survey.1

In addition, health care costs were forecasted to grow 5.5 percent annually from 2017 to 2027. And that was before the COVID-19 pandemic, which could drive up costs even more. For retirees on a fixed income, those increases could put a significant strain on their finances.2 And with 25 percent of Americans saying they have nothing saved for retirement,3 there’s plenty of opportunity for improvement.

To relieve stress that stems from money worries, employers can take a more active role in helping their employees plan ahead for health care costs in retirement.

It starts with three eye-opening conversation starters:


1.     Health care in retirement could cost hundreds of thousands of dollars – and that’s for the healthy

There are many different estimates of how much a retiree will spend on health care. The truth is, health care costs can be difficult to predict because many factors are involved like genetics, access to preventive health care services, tobacco use, exercise and geography. But the reality is, the cost will likely be higher than most people have prepared for. That really makes the case for maximizing their health care purchasing power in retirement.

According to Healthview Services, a health care cost projection firm, a 65-year-old healthy couple retiring in 2019 would spend $387,644 in health care costs over the course of their retirement.4 That’s a pretty big number.  Having a sizeable cushion in savings for health care during the golden years will take long-term planning. And providing awareness about this topic is the first critical step.

2.     Medicare doesn’t pay for everything

In fact, there are many potential costs associated with Medicare coverage. Many people underestimate the cost of health care in retirement because they think Medicare will cover all or most of those costs. And while Medicare is helpful for retirees, there are still out-of-pocket costs that your pre-retiree employees will need to be prepared for. 

Original Medicare has two components – Part A and Part B. There are also other options for Medicare beneficiaries.

Part A offers coverage for inpatient hospital and skilled nursing facilities. For most retirees, it comes at no cost for the premiums. However, for 2020, there is an annual deductible of $1,408 and there could be coinsurance costs depending on the type of facility and length of stay. Medicare, for the most part, does not cover long-term care in a nursing home.5

Part B offers coverage for physician and outpatient care with a standard monthly premium of $144.60 for 2020. (This premium is usually deducted from Social Security benefits each month). However, premiums are adjusted for income level and could be as high as $491.60 per month. Part B also has a deductible of $198. After the deductible is met, there is, on average, a 20 percent coinsurance cost. This can add up because there’s no cap to the coinsurance amount. Finally, Parts A and B do not include coverage for prescription drugs, dental or vision. Medicare beneficiaries have to pay for those coverages separately.6

Part D or PDP (Prescription Drug Plan) is an optional Medicare plan that provides prescription drug coverage. Participants can purchase these plans from private insurance companies with an average monthly premium in 2020 of $30, according to the National Council on Aging.7 There may also be more out-of-pocket costs, such as deductibles, copays and/or coinsurance.

Medicare Part C, also called Medicare Advantage Plans, is offered by private insurance companies and, if selected, would replace Original Medicare (Parts A and B). Depending on the plan, it might also include prescription drug, vision and/or hearing coverage. Participants have to pay the Medicare Part B monthly premium and may have to pay extra depending on the specific plan selected. To protect against the high costs from a catastrophic medical event, Medicare Advantage plans have a limit on a member’s annual out-of-pocket costs.

Medicare Supplement plans, sometimes called Medi-gap plans, are one more option. These plans are designed to help pay for out-of-pocket costs arising from having Original Medicare (Parts A and B). Like Medicare Advantage Plans, some Medi-gap plans have a limit on how much participants pay for annual out-of-pocket costs. These plans, according to eHealth, had an average monthly premium of $152 in 2019.8

It's clear that costs under Medicare may be higher than your employees expect to pay for health care in retirement.

3.     A health savings account (HSA) could be more valuable in retirement for health care than a 401(k) savings plan

401k savings plans are designed to replace income in retirement. 401(k) withdrawals are added to income and taxed. Health savings Accounts or HSA’s are different –the government allows tax-free saving and spending from these accounts as long as their use is restricted to eligible health care costs. Helping employees understand this difference is critical to financial well-being in retirement.

So, what should you tell your employees when they learn they may need over $300,000 to cover health care costs in retirement?

Well, chances are your company offers a 401(k) retirement savings plan. And if your benefits package includes a qualified high deductible health plan, then enrolled employees may also be eligible to enroll in an HSA. Helping those eligible employees understand the differences between a 401(k) and an HSA will go a long way in helping them increase their purchasing power — and be better prepared for health care costs in retirement.

There are similarities between an HSA and a 401(k):

  • Contributions to these accounts are on a pretax basis
  • There are maximum contributions that can be made each year
  • Dollars in these accounts can be invested into mutual funds or other types of investment vehicles to take advantage of compound annual growth over time
  • Assets in these accounts grow tax-free

However, there is one big difference that makes an HSA superior to a 401(k) account when it comes to health care costs:

In retirement, HSAs are not strictly limited to health care expenses. Non-eligible withdrawals are simply treated the same as a 401(k) withdrawal, with income tax paid. In the end, HSAs perform better than a 401(k) for health care-related expenses, and the same as a 401(k) for everything else.

By taking an active role and educating employees about the potentially high cost of health care in retirement, what Medicare really costs, and the tax advantages that make an HSA superior to a 401(k), you can help your employees increase their health care purchasing power when they retire.

Take a look at our white paper which takes a deeper dive into increasing your employees’ overall purchasing power. 






1 PwC. PwC’s 9th annual Employee Financial Wellness Survey 2020 COVID-19 Update. Available at: Accessed August 12, 2020. 

2 Peter G. Peterson. Healthcare Costs for Americans Projected to Grow at an Alarmingly High Rate. Available at: Accessed July 13, 2020.

3 Federal Reserve System. Report on the Economic Well-Being of U.S. Households in 2017. Available at: Accessed July 22, 2020.

4 Health View Services. Why Health Needs to be Part of Retirement Planning. Available at: Accessed July 22, 2020.

5 Medicare Costs at a Glance. Available at: Accessed July 13, 2020

6 2020 Medicare Parts A & B Premiums and Deductibles. Available at: Accessed July 15, 2020.

7 National Council on Aging (NCOA). My Medicare Matters. How Much Does Medicare Part D Cost? Available at: Accessed July 16, 2020.

8 eHealth Medicare. How Much Does a Medicare Supplement Insurance Plan cost? Available at: Accessed July 22, 2020.



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