Medicare misconceptions are leaving retirees exposed to steep health care bills

Many Americans heading into retirement do not have a clear sense of what their health care expenses will really look like, leaving financial advisors as a crucial source of guidance.

According to the Allianz Center for the Future of Retirement’s Annual Retirement Study, six in 10 Americans are worried they will not be able to pay for health care once they stop working.

The survey, conducted with 1,000 adults ages 25 and older, found especially high concern among Gen X respondents, 76 percent of whom said they were worried about health care affordability. That compares with 60 percent of millennials and 56 percent of boomers.

The concerns come as retirement health care costs continue to look increasingly burdensome. Fidelity Investments projected that Americans retiring this year will spend an average of $185,000 on medical expenses over the course of retirement, including Medicare Parts A, B and D but excluding long-term care.

HealthView Services estimated in its Retirement Healthcare Costs Data Report that long-term health care costs are rising at an annual rate of 5.8 percent, well above the projected 2.4 percent Social Security cost-of-living adjustment for the same period.

Long-term care remains a major source of worry. The Allianz Life study found that 62 percent of Americans are concerned they will not be able to afford long-term care, while 60 percent are unsure whether Medicare will still be available throughout retirement.

A costly misunderstanding about Medicare

The more alarming issue in the survey is not just the anxiety itself, but the misconceptions fueling it: many people do not fully understand what Medicare covers.

About one-third of respondents, 34 percent, incorrectly said Medicare pays for long-term care. It does not. More than a third, 37 percent, believed Medicare is automatically available at retirement, even though eligibility generally begins at age 65, which means early retirees may face a coverage gap.

Two in five respondents, 43 percent, thought prescription drugs are included in Medicare’s standard coverage, although Original Medicare requires separate enrollment in Part D. Another 23 percent said Medicare is free, despite premiums, deductibles and other out-of-pocket costs that can vary based on income and work history.

Those misunderstandings can lead directly to inadequate saving. In separate Fidelity research, 54 percent of pre-retirees mistakenly believed Medicare would cover all of their health care costs in retirement, an error that could leave them responsible for tens of thousands of dollars in unexpected expenses.

“Health care is one of a retiree’s largest ongoing expenses, and many Americans don’t realize that Medicare won’t cover everything, especially long-term care,” said Kelly LaVigne, vice president of consumer insights at Allianz Life. “That knowledge gap can leave retirees paying more out of pocket than anticipated. Understanding what Medicare does and doesn’t pay for is an important part of building a retirement strategy.”

An opening for financial advisors

For advisors, the findings point to both a planning challenge and a chance to stand out. Fifty-five percent of respondents said they worry about navigating Medicare and choosing the right coverage, suggesting that many clients are looking for help.

Health care spending for people age 65 and older is more than twice that of working-age adults, according to the U.S. Centers for Medicare & Medicaid Services. The agency’s National Health Expenditures data also projects health care spending growth will outpace GDP growth from 2025 through 2034. That makes health care planning a central part of retirement income strategy rather than a side issue.

One increasingly common approach is to tie essential retirement expenses, including health care, to guaranteed income sources. Annuities, along with Social Security, can create a more predictable income base that helps protect clients from market swings and the risk of drawing down savings too quickly.

LaVigne said advisors can help close the Medicare knowledge gap. “A financial professional can help build a strategy that addresses health care costs alongside other retirement risks like inflation and market volatility,” she said.

As health care remains one of retirement’s biggest and least predictable expenses, advisors who can clearly explain Medicare, long-term care choices and income protection strategies may be especially well positioned to meet a real client need.