How to Manage Health Care Costs In Retirement

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We all know that health care costs continue to skyrocket, but how many of us consider what those rising costs will mean for retirement? Gone are the days when retirement meant a lifelong pension and health care. Even some current retirees who were promised these things are having the rug pulled out from under them when their former employers find that they can no longer afford to insure them. So when it comes to your health care in retirement, it pays to plan ahead and not count on your employer. Here is what you need to know about staying healthy (and financially stable) after retirement:

Hang In There Until Medicare Kicks In

If you can hold off on retirement until age 65, you’ll have a leg up on health care costs, since you’ll then be eligible for Medicare, the federal health insurance program for seniors over 65 and the disabled. While all the rules and regulations for Medicare are dizzyingly complex, here is a basic breakdown of the four types of Medicare:

Medicare Part A covers seniors who need to be hospitalized. As long as you have paid into Social Security for at least ten years, you pay no premiums for using Part A.

Medicare Part B covers doctor visits and some outpatient needs, such as physical therapy and medical equipment. Some preventive care is also covered under Part B. Seniors using Part B must pay a monthly premium of around $100, although the premiums go up depending on their income.

Take special care to enroll for Medicare Part B when you are eligible because there’s a stiff penalty for not doing so. For each 12 month period you delay, the premiums go up 10% for the rest of your life if you ever sign up. One of my aunts mistakenly thought she could save some money by waiting 3 years after she became eligible before she signed up. Big mistake. Not only did she not have coverage and paid all her checkups out of pocket for 3 years, but her premiums are also now 30% more than what she would’ve been paying and that penalty will continue for the rest of her life.

Medicare Part C is also referred to as Medicare Advantage. Part C consists of private insurance plans that are run through Medicare. Basically, these plans offer additional coverage to what you get through Parts A and B. You will have to pay a monthly premium for Part C, which varies from state to state and insurer to insurer.

Medicare Part D is a separate policy that you purchase through a private insurer. This policy covers prescription drugs.

Maintain Coverage

If you choose to retire early or are laid off from your job before age 65, find a way to continue your health insurance until you are eligible for Medicare. According to US News and World Report, “workers who retire before they qualify for Medicare at age 65 often face the steepest health care costs. According to a Towers Perrin survey, the average cost of premiums for employer-provided coverage for retirees under 65 is $13,308 a year. The typical early retiree is expected to pick up $6,960 of that tab.”

If you are laid off, remember that you have the option of continuing on your employer’s coverage through COBRA, which lasts 18 months after your termination date. Alternatively, you could join your spouse’s health care plan or purchase an individual plan. You can also look for a plan in the Affordable Care Act Health Insurance Marketplace. The good news is that anyone who becomes unemployed qualifies for the Special Enrollment Period, which allows the participants to enroll or change their healthcare plan. None of these options are cheap, but you may be able to get a higher subsidy in the case of the marketplace plans because your income is now projected to be lower. In any case, all of these options will help keep your retirement nest egg safe—rather than seeing it all eaten up by one medical emergency.

Consider a Health Savings Account (HSA)

An HSA can work much like an advanced version of retirement investment accounts: you contribute money on a pre-tax basis and grow tax-free. Withdrawals are also tax-free even if the account grows into the millions as long as you use the funds for medical costs. That’s why you sometimes hear how HSAs are triple tax-free accounts.

Be careful if you use the funds for non-medical costs though. Any withdrawal from your HSA for non-medical costs will cost you in taxes, and withdrawal before age 65 costs you a 10% penalty as well. Unlike contributions to a Flexible Spending Account (FSA), the money you contribute to an HSA won’t be lost if you don’t use it by year-end. That’s why you can put money in there and just let it accumulate until the time you need it.

There’s one more caveat. To get the tax breaks on an HSA, you need to also be enrolled in a High Deductible Health Plan. This means that you will have to plan for paying for the deductible every year for even your routine medical needs.

The Bottom Line

These days, retirement planning needs to include specific plans for health care. Costs keep going up year after year and there are no signs of it relenting. Like I said before, one mishap can ruin your retirement. That’s why you need to make sure you take the time to decide how you will handle your health care costs in retirement.

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  • EdG says:

    I’ve been using the Affordable Care Act for almost 5 years now since I retired. I’ve chosen the HSA high deductible plan and it has worked well for me. The plans HSA plans are inexpensive but are good insurance for a medical catastrophe. This year the ACA benefits have been extended to higher income individuals. It’s worth a look. The downside is there’s some chance congress could change/eliminate the ACA in future. I think we’re good for 4 years but beyond that is questionable.

    • David @ says:

      It’s true anything can happen but I doubt congress will be able to just remove ACA at this point. So I feel like you are safe with the program. I mean, the law has already been passed for over 10 years now and no one really talks about it anymore so it’s not a political point anymore.

      Do you mind me asking how cheap the plans are? Those numbers without subsidies really scare me whenever I look at their website.

      • EdG says:

        It’s best to do the numbers yourself but I’ll give you 2 examples. For a couple, if your income is 60K your premium is about $225 a month. If your income is 100K then your cost is about $365 a month.
        This is for a HSA plan with a 7K per person deductible. You pay the negotiated rates up to the 7K. This year, and next at least, the subsidies have been extended to about 200K income for a couple. Not sure after that. Previous income limits were about 68K for a couple, 4X the federal poverty limit. If you don’t get the subsidy it’s probably not worth it.

        • David @ says:

          $225 a month isn’t terrible, but it’s not cheap for catastrophic insurance. I wonder if the US will ever find a way to trend towards a more reasonably priced healthcare system.

          That’s an entirely different discussion though.

          Thank you for sending me the numbers!

  • Leo Wyatt says:

    After retirement, I think the most important thing is to care about the health. If You are healthy and alive, every thing will be fine.

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