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Medicare drug costs soar — here are a few things to consider for your retirement budget

The cost of healthcare in retirement is one of those great unknowns in life that no one wants to think about when they’re young and healthy. Rest assured, though, one day you’ll be there.

The fact is that out-of-pocket medical bills will eat up more of your retirement budget than you can fathom. Fidelity’s retiree healthcare cost estimate shows that if you retire this year at age 65, you can expect to spend an average of $157,000 on medical expenses throughout retirement.

So there's plenty to consider and plan for.

For example, there's new data on Medicare drug inflation and what it means to retirees. And there are warning signs, in the latest government data, when it comes to assisted living. And, oh, watch out for the rules that govern how you take money out of your healthcare spending account (HSA).

Here are a few things that came across my desk this week that you ought to pay attention to:

Medicare drug costs are off the charts: The 25 top Medicare Part D drugs, on average, have more than tripled since they first entered the market, according to a new report out last week from AARP’s Public Policy Institute. That far surpasses "the corresponding rate of general inflation," according to the research.

The surging cost of these medications — from a blood thinner to a formula that keeps joint damage from worsening for people with rheumatoid arthritis — can be particularly tough for Medicare Part D enrollees who take an average of four or five prescription drugs every month, according to Leigh Purvis, prescription drug policy principal at the AARP Public Policy Institute, and author of the report.

A couple playing pickleball together. They are a doubles team. The Hispanic woman, in her 50s, is concentrating on hitting the ball with her pickleball paddle. Her partner, a senior man in his 60s, is watching.
Fit as a fiddle. Staying healthy will be key in retirement with rising healthcare costs. (Getty Creative)

Currently, prescription drugs account for about 20% of Medicare patients’ out-of-pocket healthcare costs, according to the Commonwealth Fund. Not surprising, then, that one in five older adults are not filling a prescription or skipping doses to save money on their medications, Purvis said.

"The rising cost of these drugs is crippling for retirees today, especially when so many Social Security recipients have only moderate or even no savings," Mary Johnson, a Social Security and Medicare policy analyst for The Senior Citizens League, told Yahoo Finance.

See related story: Top savings tools — 4 alternatives to savings accounts

Help may be on the way. Maybe.

The Inflation Reduction Act, a federal law passed last year that requires drug companies to pay a penalty to Medicare if their drug’s price increases faster than the rate of inflation, gives Medicare the ability to negotiate lower drug prices with drug companies for the first time. The Centers for Medicare & Medicaid Services is expected to announce the first 10 drugs selected for negotiation by Sept. 1. The trouble is that the new prices won't become available until 2026.

Nursing home costs? Don't ask: On top of stratospheric out-of-pocket bills for many prescription drugs, costs for nursing homes and adult care surged by the largest monthly amount in July, according to new inflation data. The latest report from the Bureau of Labor Statistics released last Thursday showed that the costs for nursing homes and adult care increased by 2.4% in July from the previous month, the biggest gain on records dating back to 1997.

It’s mind-boggling. An apartment in an assisted-living facility had an average rate of $73,000 a year as of the second quarter of 2023, according to the National Investment Center for Seniors Housing & Care —and costs go up as residents age and need more care. A unit, or room and board, for dementia patients can run more than $90,000 annually.

Big red warning flag: Johnson of the Senior Citizens League warns that you shouldn't expect your Social Security monthly check to cushion bills. Healthcare costs typically grow two to three times faster than overall inflation. "The rising cost of these drugs can be crippling because cost of living adjustments (COLAs) won’t come close to offsetting your prescription drug and other healthcare costs as you age," she said.

Here's one reason why: The Consumer Price Index for Urban Wage Earners and Clerical Workers, used to calculate the annual increases, assumes that consumers spend 7% of their total budget on healthcare. In reality, older consumers tend to spend 16% or more of their household budgets on healthcare, said Johnson.

Ways to get relief: There are programs that help people with limited resources to pay for their premiums and cost-sharing. But many people who are eligible are not enrolled. To find out if you’re eligible, start by contacting your state’s Medicaid program or your State Health Insurance Assistance Program.

If you still have years to retirement, you can contribute to a health savings account, or HSA. To be eligible, though, you must be enrolled in a high-deductible healthcare plan. The annual inflation-adjusted limit on HSA contributions for self-only coverage under a high-deductible health plan is $3,850. The HSA contribution limit for family coverage is $7,750.

The beauty of it is that an HSA has a triple tax advantage for your retirement savings. It lets you put money in on a tax-free basis and allows it to build up tax-free, and spend it tax-free for qualified healthcare expenses.

Word of warning: If you pull the funds from the HSA before age 65 for something other than qualified medical expenses, your withdrawal will be subject to income tax, plus a 20% penalty. After 65, non-qualified medical expense withdrawals will be subject to tax only.

In other words: Don't try using the money for a vacation to St. Barths.

Kerry Hannon is a Senior Reporter and Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of 14 books, including "In Control at 50+: How to Succeed in The New World of Work" and "Never Too Old To Get Rich." Follow her on Twitter @kerryhannon.

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