ROAD TO RETIREMENT
CHAPTER 7: Healthcare Costs in Retirement - The Biggest Wildcard
Last chapter I wrote about the 4 most important retirement risks every retiree needs to be on guard against heading into retirement. The risks in Chapter 6 are more ‘death by a thousand slashes’ types of risks. Risks that slowly eat away at your financial health over time if you are not careful. However there is one risk that I didn't mention because it is potentially so disruptive, so costly, and so impactful to one’s retirement lifestyle that it honestly needs its own chapter…Healthcare Costs in Retirement.
In contrast to Chapter 6, unexpected healthcare risks are more like a sledgehammer, with the potential of changing the course of your retirement lifestyle in an instant. Failing to prepare for these costs could deplete your retirement savings much sooner than you think. In fact, healthcare costs are among the most common causes of bankruptcy for people over 651. Even worse, many retirees forgo proper care because they simply can’t afford it. In a recent study, over 52% of people 65 and older who experienced bankruptcy said they did so without necessary medical care, such as surgery or dental visits, the year before.1
Even if you’re healthy, medical care will undoubtedly be a significant component of your annual retirement budget. For example, according to a recent report, the average healthy 65-year-old couple will spend about $12,200 per year on healthcare — more than twice what they expect to pay heading into their golden years!2
Many people might assume that Medicare will pay for their healthcare expenses or that Social Security will somehow magically provide funding for you. However, the reality is that as people today are living longer3 and healthcare costs continue to rise4, government type healthcare programs aren't keeping pace with anything more than just the bare bones necessities. And so, no retirement plan is complete without accounting for this risk. To protect both your health and your finances, it’s essential to carefully think through your retirement healthcare options and how you’ll pay for them. Here is a quick primer to get you started.
The Basics of Medicare
Medicare is a federal healthcare program that you pay into throughout your working career, much like Social Security. Currently, more than 61 million Americans are covered by Medicare.5
Although the average retirement age in America today is 626, most retirees won’t qualify for Medicare until they turn 65. That means there may be several years between the day you retire and when Medicare will kick in. But even when you are eligible for Medicare, it doesn’t cover everything. So there will still be out-of-pocket costs, such as deductibles, copays, and potentially co-insurance for non-covered expenses.
Medicare vs. Medicaid
Medicare is often confused with another government-sponsored healthcare program called Medicaid.
The key difference is that Medicaid is a low-income assistance program available to people at any age, while Medicare is for people 65 and older (or those with specific disabilities or illnesses), regardless of their income.7
What’s covered by Medicare: An overview of Parts A through D
Medicare is divided into several parts: A, B, C, and, you guessed it, D. Each part of Medicare offers a different category of coverage and may have its own premium.
Here’s an overview:
Part A
This component of Medicare pays for inpatient care in a hospital or limited post-hospital care at a skilled nursing facility. Part A also covers some home health care and hospice care.8
Luckily, most people don’t have to pay a monthly premium for Part A, as this is the portion you paid into through payroll taxes during your career.8 However, there is a deductible, which is $1,556 for 2022.
While other healthcare coverage may have annual health insurance deductibles, this deductible is per benefit period. A benefit period9 begins when you are admitted for inpatient care and ends after you reach 60 consecutive days without any inpatient treatment. Once the 60-day mark passes without treatment, that benefit period ends. You’d then start a new benefit period — and be responsible for another deductible — the next time you need inpatient care.
In addition, co-insurance is also typically required if your benefit period lasts longer than 60 days. Starting on the 61st day, you are responsible for $389 in coinsurance for each day up to the 90th day. It becomes increasingly more expensive past that point.10
Part B
Medicare Part B pays for doctor visits and medically necessary services, such as ambulance bills and medical equipment. This portion also covers preventative care, like bone density measurements, cardiovascular disease screenings, and flu shots, without out-of-pocket expenses.
However, many people are surprised to learn that Part B isn't premium-free. In fact, everyone is required to pay the standard premium, which is currently $170.10, adjusted annually. You may also have to pay an additional surcharge as high as several hundred extra dollars per month, depending on your income.
The deductible for Part B is $233 for 2022. But, you’re typically responsible for copays, as well.
Medigap Insurance
‘Medigap’ or ‘Medicare Supplement Insurance’ is insurance you buy on your own from private insurance carriers that helps fill in the ‘gaps’ not covered by traditional Part A or Part B. A Medicare Supplement Insurance policy can help offset some of the non covered health care costs like between Parts A and B such as:
- Copayments
- Coinsurance
- Deductibles
Part C
Part C can be an alternative to the A and B (plus medigap) route many people choose. Part C is more like a bundled In- Network health care plan. These plans, known as Medicare Advantage, are purchased from a private insurance company, which will take over and manage your Parts A and B benefits for you. Many Advantage Plans include additional benefits, such as dental, vision, and hearing coverage. Prescription drug coverage, found in Part D, is also typically available within a bundled plan.11
While Medicare Advantage plans must follow specific rules set in place by Medicare, the costs and coverage can vary depending on the provider. Therefore, it’s best to compare plans to ensure you get the right coverage for your needs.11
Part D
Prescription drug coverage is available through Part D by Medicare-approved providers. Plan costs are based on the prescriptions used and deductibles can vary depending on the plan you choose, but they are capped at $480 per year.12
When to apply for Medicare
You first become eligible for Medicare when you turn 65, but enrollment isn’t automatic unless you are already receiving your Social Security benefits.
If you must enroll, your sign-up period for Medicare is a seven-month window starting three months before you turn 65 and ending three months after you turn 65. If you don’t sign up during this initial enrollment period, you will have to wait until general enrollment, which runs from January to March each year.
While it’s okay to show up fashionably late to some things in life, doing so for Medicare could mean additional costs. If you decide not to enroll in Medicare Part B initially but choose to do so later, you may have a gap in coverage and be required to pay a higher monthly premium. Your monthly premium will go up 10% for each 12-month period you were eligible for Part B but didn’t sign up for it.13
What’s worse is, in most cases, you can’t get rid of that penalty — meaning you could be stuck paying it for the rest of your life or for as long as you have Part B.13
Unlike group medical plans that you may be accustomed to, you can only enroll in Medicare on an individual basis. If you have a spouse, you’ll both sign up separately within your designated enrollment periods.
Medicare doesn’t cover everything
While the various parts of Medicare cover many of the most routine medical costs, it’s clear that there will still be expenses to consider. Dental care, eye exams, dentures, cosmetic surgery, massage therapy, chiropractic maintenance, hearing aids, and experimental drugs and procedures are often not covered by traditional Medicare, so plan for these expenses out of pocket the best you can.
What are your healthcare options if you retire early?
If you retire before age 65, then you’ll want to have a plan to bridge the gap between early retirement and when you qualify for Medicare.
Here are some options you could consider:
- Continue coverage from your employer's group plan through COBRA. Typically, you’d have to pay the full cost of your insurance because your former employer will no longer cover a portion for you. Your premium may also increase substantially.
- Purchase coverage from a private company or through the Affordable Care Act (ACA) marketplace.
- If your spouse is still working, join their group plan at work.
One not-so-nice surprise you will discover is that health insurance can be expensive when your employer isn’t subsidizing a portion of the bill. This is a major reason why the Affordable Care Act was enacted.14 In 2010 President Obama signed into law the Affordable Care Act - also known as Obamacare. This ACA is a government based exchange that allows you to find group like health coverage even if you are no longer working, providing a very cost effective health insurance solution to those that want to retire before age 65.
A vital feature of the ACA marketplace is that you may qualify for premium subsidies depending on your income. Also, remember from the previous chapter that you can influence your taxable income in retirement. ACA subsidies may be one thing you need to consider when shifting income around to manage taxes.
Don’t forget about long-term care
Long-term care (LTC) is any medical care that is generally required for longer than three months. Most often it is care needed to perform basic activities of daily living. That means things like eating, bathing, dressing, transferring and using the bathroom. The goal of long term care is to help you maintain your lifestyle as you age. These services may take place in a nursing home or assisted living facility, or even for caretakers coming to your home.15
Long-term services may be required due to medical conditions resulting from an accident, illness, advancing aging, stroke, or other chronic medical condition. Long term care needs can also arise due to cognitive impairment such as dementia.15
Unfortunately, none of the Medicare plans or most health care coverages pay for these long term services. Yet, the reality is around seven out of every 10 seniors will need long-term care at some point in their lives.15
If you do not prepare, then these costs can pose an extraordinary threat to your retirement security.Why? Because long-term care costs can be extremely high, reaching $50,000 to upwards of $100,000 per year on average.16 17
Long-term care insurance is a good option to transfer some of this risk to an insurance company. Even though this kind of insurance can often seem pricey, a good professional well versed in this area can guide you to a plan that can easily fit any discerning budget.
How to use a Healthcare Savings Account to your advantage
A Healthcare Savings Account (HSA) lets you set aside money on a pre-tax basis to pay for qualified medical expenses. If used strategically, you may have a healthy balance (pun intended) of savings that can provide you with a source of tax-free money to pay for healthcare, even after you are retired!
There are many ways to take advantage of tax-free distributions from your HSA. You can pay for the direct cost of care, the out-of-pocket costs that Medicare doesn’t cover, or even for Medicare premiums. You can stretch that benefit even further by coordinating your HSA withdrawals with your other income sources for a broader tax impact.
Please communicate your intentions with loved ones.
As we age, we often neglect to communicate our healthcare plans with loved ones. It's an icky subject and often easier to avoid. However I strongly encourage you to sit down with them now and share your plan and wishes when able. Wills, Trusts, Powers of Attorney, Advanced Directives, funeral and burial arrangements are all tough conversations to have without loved ones. However those loved ones bear the brunt of the care stress in the future, so it's incumbent on you now to make sure your objectives are clear.
Recently a colleague of mine who works in the industry as a Care Manager, shared the following story.
“I have a client who purchased long-term care insurance several years ago. Her primary goal was to protect her assets and her house to ensure she had something to leave to her two sons. She bought a policy with Partnership protection and felt confident her goal would be met.
A couple of years ago, one of her sons called me because his mother was getting a rate increase and he thought she should not keep the policy. She was a very healthy 82 year old who still traveled extensively, went on ski vacations, cruises etc. He felt the $6,000 per year premium was not money well spent. He said he and his brother were not looking for an inheritance and felt his mother should just use her own assets to pay for her care if and when she ever needed it. Since his mother had no cognitive issues and was one of those amazing seniors who still looked and acted much younger than her age, he just couldn’t imagine her ever needing long-term care. Luckily, the mother put her foot down and told him she didn’t care how much it cost se was keeping the policy.
Fast forward two years and I received another call. His mother had recently returned from a three week trip to Europe. She wasn’t feeling great when she left but didn’t want to disappoint her friend by canceling the trip. She went to the doctor as soon as she got back and went through a battery of tests. She was diagnosed with liver cancer and some other issues that would require surgery and extensive treatments and rehab. It is unclear if she will be able to return home or if she will have to go to an assisted living facility. If she does go home, she will need around the clock care.
The son told me he had researched facilities and home care options in the area, and he could not believe how much care would cost! He said that even if they sold the house and used all her assets, she would run out of money in about four years. I explained this is what long-term care insurance is for and suggested we initiate the claim immediately. As we talked, he admitted he just couldn’t believe how quickly things could change. Two months ago, his mother was still the athletic, energetic person he’d known all his life and now she was extremely sick and might require care for the rest of her life. She was expected to recover but would never return to the person she was before the illness and could live another 10 years.
Needless to say, he is now very thankful that his “stubborn” mother did not agree with him about canceling the long-term care insurance. In fact, he said this had been such an eye opener for him and his brother that they are both looking at getting insurance for themselves since they are now in their late fifties.
Unfortunately, many people, like this son, don’t understand the cost of long-term care until they have to deal with it. And then it can be too late. We need to continue to talk about long-term care actively and consistently with our clients until they realize if they have a long-term care event and they are not insured, the premium at that point will be everything they own”.
A retirement advisor can help you navigate healthcare expenses
Of course, a lot goes into navigating retirement healthcare and preparing for the costs. Its also often a complex and multi-generational conversation. An experienced and skilled retirement advisor can help you understand your options and ensure you and your family are as prepared as possible.
Watch for additional posts and planning tips in the weeks ahead, or contact us any time to discuss your planning needs.
Your Long Term Care Action Plan: A Step-by-Step Guide
It is important to think through the implications of LTC on retirement plans, the effect that paying for LTC may have on you or your spouse, and options that can defray these costs. Here you will find four steps to consider when thinking about LTC.
What is Medicare and What Does it Cover?
For those approaching the age of 65, Medicare can be confusing, and you might also be wondering how it compares to your current health care coverage. This guide addresses your questions about Medicare and how you might deal with coverage gaps.
5 Tips for Navigating Medicare in Retirement
One of the main concerns about retirement is health care. As healthcare costs continue to rise, medical bills may quickly derail your retirement plan. The good news is when you turn 65, you will be able to apply for Medicare, which provides you with coverage for some of the larger bills you may face during your retirement. Though navigating Medicare is a little tricky, the following tips can make the process less daunting.