As your thoughts turn to retirement and you start to figure out how much you'll need to pay for health care, one question in particular may pop into your mind: Medicare versus Medicaid — what's the difference?
In short, the answer is "a lot." But after learning the basic differences, you might also want to think about how the benefits of these two government programs could affect how you prepare for retirement. The bottom line is that a significant percentage of your retirement income will probably go toward paying medical bills, so understanding how that balance will likely play out can go a long way.
In a nutshell, Medicaid is a joint federal and state program that helps some people with limited income with medical costs, and offers benefits not normally covered by Medicare, including nursing home care and personal care services. It's intended for low-income individuals, as well as disabled persons and children in poor families. Medicaid eligibility standards vary by state.
One important and potentially costly service commonly covered by Medicaid is long-term care (LTC). LTC services include daily-living assistance for the chronically ill or disabled, such as bathing, dressing and using the restroom. In fact, Medicaid is the country's largest funder of LTC services, according to the Administration on Aging. But if your allotted funds run out or you're ineligible, you'll need to prepare to face that expense with your own savings, or possibly the help of LTC or other insurance.
Medicare covers a large portion of medical and related expenses for Americans age 65 and above, regardless of income. It's handled entirely by the federal government — you've been helping to pay for your future Medicare benefits through your payroll taxes, just like Social Security.
Medicare's benefits are divided into three parts:
- Part A covers hospital care, skilled nursing facilities, lab tests, surgery and home health care.
- Part B covers physician and other provider services (both as needed and on a preventive basis), plus care at outpatient facilities. It also covers "durable medical equipment," such as wheelchairs, oxygen and kidney machines, and home health care.
- Part D covers specified prescription drugs.
What happened to Part C? Well, that's Medicare Advantage Plans, which are sometimes referred to as "Medicare Part C." It's a type of private health insurance you pay for when you're already enrolled in Medicare. It's optional, and brings additional benefits not offered by Parts A and B — and possibly Part D as well. There are different Medicare Advantage Plans available in most areas to meet different needs.
When thinking about your retirement savings needs, you may want to keep the cost of Medicare premiums in mind. Even when you have a Medicare supplement program in place, there's a good chance you'll incur other medical expenses you'll need to cover on your own. Between the premiums you pay and uncovered health-related expenses, the average couple currently aged 70 will spend a combined total of $122,000 over the rest of their lives, according to one study from the National Bureau of Economic Research.
Adjusting Your Retirement Preparation
If that cost looks high to you, remember you can always help manage it by factoring Medicare, Medicaid and general medical expenses into your overall retirement preparations. Consider taking the following steps:
- Estimate the after-tax income you'll need to live on in retirement, including expenses such as housing, travel, food and expected recreational costs, along with medical payments. It's important to fill out this picture as much as possible, although some details you won't know for sure until retirement. Consider the potential impact of inflation on your projected income needs as well.
- Project the income you'll receive from Social Security and any other sources of long-term income you have, like a well-funded traditional pension.
- Subtract the Social Security and any other income from your estimated income needs to determine your probable savings needs.
At this point, you may want to consult with a financial professional to help figure out how much you'll need to accumulate in additional savings by the time you're ready to retire, along with strategies that could help get you there. The sooner you have a realistic idea of your overall retirement finances, the sooner you can determine how much Medicare and Medicaid could help you when the time comes.