How to cope with health care costs in retirement
How much do you figure you'll pay for health care expenses after you retire? You're probably underestimating.
A married couple, both age 65, will fork over an estimated $275,000 over their lifetime on medical costs, according to Fidelity Investment's "2017 Retiree Health Care Cost Estimate." That includes Medicare premiums, co-payments, deductibles and out-of-pocket expenses for prescription drugs.
However, it's likely that this same couple will pay a lot more than $275,000 because Fidelity's estimate doesn't include items such eye exams and glasses, hearing aids, dental care and long-term care. And if you retire before age 65, the number will be significantly higher.
Medical expenses represent one item in retirees' budgets that can increase significantly when transitioning from your career job into retirement. According to the U.S. Bureau of Labor Statistics, employers on average subsidize 80 percent of the cost of health care premiums for their active employees and more than two-thirds of the costs for family coverage.
But these subsidies typically go away when you retire. As a result, you'll usually end up paying for the full cost of medical insurance premiums if you retire before age 65, when you're eligible for Medicare. After that, the federal government subsidizes about three-fourths of the cost of Medicare Part B, although you'll still pay substantial deductibles and co-payments.
One erroneous conclusion that some people might make after reading about the Fidelity study's results is that they need to have the full $275,000 amount set aside when they retire, to be dedicated exclusively to future medical expenses. While that might be great if you can swing it, most people don't have that luxury, and fortunately you don't need to do that.
You can pay for much of your medical costs with your regular retirement income, such as your Social Security benefits, employer pensions if you have one, money you make working in retirement and your withdrawals from savings.
By making smart choices with Medicare and supplemental insurance, you can turn large, unpredictable expenses into regular monthly premium payments that you can then factor into your ongoing retirement budget. Because Medicare has substantial deductibles and co-payments that can amount to thousands of dollars each year, financial advisers highly recommend that you buy supplemental medical insurance in one of two ways:
- Purchase a "Medigap" plan that pays for part or all of Medicare's deductibles and co-payments, combined with a separate insurance plan that covers the cost of prescription drugs under Medicare Part D.
- Purchase a Medicare Advantage plan (MA) that typically integrates inpatient care, outpatient care and the cost of prescription drugs, and usually covers much of Medicare's out-of-pocket costs.
You can also save for medical expenses with a Health Savings Account (HSA), in which contributions have a unique triple tax advantage:
- They're deducted from your taxable income when they're made
- Investment earnings aren't taxed
- Any amounts you withdraw for qualified medical expenses aren't included in your taxable income
Because of the triple tax advantages, HSAs are like a super-IRA, and you should save as much as possible in these plans while you're working.
Qualified medical expenses that can be paid from an HSA include:
- Medical, dental, prescription drug and vision expenses, including any deductibles and co-payments
- Premiums paid after age 65 for Medicare or for your employer's retiree medical plan (but not for Medicare supplement plans)
- COBRA premiums
- Long-term care services
- Premiums for qualified long-term care insurance
You'll also want to plan for vision and dental expenses when you retire because Medicare doesn't cover these costs. Some MA or Medigap plans might help with these costs, so you'll want to ask about that when you're shopping for these plans. Another smart tip: Take full advantage of your employer-provided medical plan's vision and dental benefits before you walk out the door of your career job.
Long-term care is the wild card in your retirement planning. A lengthy stay in an assisted living facility or nursing home can quickly drain your retirement savings, even if you have substantial savings in an HSA, 401(k) or IRA. Ideally, you want to develop a thoughtful strategy to protect yourself and your family against potentially ruinous long-term care expenses, including some combination of:
- Buying long-term care insurance
- Holding home equity in reserve
- Taking out a reverse mortgage line of credit and holding it in reserve for long-term care
- Maintaining a separate investment account for long-term care, including an HSA
- Buying a qualified longevity annuity contract (QLAC) that starts a lifetime income at an advanced age, such as age 80 or 85.
When you consider your potential costs for health care, you might be convinced it's a smart idea to work longer, which is a very reasonable -- and wise -- reaction to these threats. Working longer can not only extend subsidized medical care coverage from your employer, but it can also allow your Social Security benefits and savings to grow as long as possible.
You have a lot to consider when it comes to your retirement planning. But if you start now, you'll be prepared when the time comes to leave the work force entirely.
