Healthcare is one of the biggest and most unpredictable line items to prepare for in retirement. Medicare kicks in when you turn 65 however there is a big gap in what Medicare covers vs. the coverage you’re used to from your employer’s group plan.
For a couple retiring in 2015, Fidelity Investments reports that they will need to have an additional $245,000 in savings to cover their healthcare costs in retirement.
The estimate for younger people planning for healthcare costs in retirement is staggering. Healthview Services found that the total healthcare expenses for a 45-year-old couple planning to retire at age 65 will near $592,275 in today’s dollars, and $1.6 million in future dollars.
While it’s important to talk about the estimated costs, there are ways in which you can prepare beyond the numbers.
The first thing is to familiarize yourself with the programs and tools available to you. Following is a breakdown of what you should know now in order to understand your options later:
1. Medicare
Medicare is a federal government insurance program that all U.S. citizens are eligible for at the age of 65. The program is complex but here are the basics:
a. THE PARTS
The two main components to Medicare are Part A and Part B. Part A is known as “hospital coverage” because it is mostly focused on coverage for a hospital stay. Part B covers outpatient and preventative services, such as doctor’s visits.
Medicare Part D is a supplemental program covering prescription drugs.
b. MEDIGAP
Medigap is so called because it provides coverage for health care costs that are not covered by Medicare Parts A or Part B. Without it, you may lack coverage for co-pays, co-insurance and deductibles that Medicare A and B do not cover.
Medigap is offered by private insurance companies and there are several variations of plans available, depending on your priorities. Medigap provides to individuals only and does not cover long-term care services.
2. Managing Costs
There are tools and strategies available to help you manage future healthcare costs and the risk of needing extended assisted living care.
Here are a couple tools:
a. LONG-TERM CARE INSURANCE
One way to manage the risk of a health care event causing the need for round the clock care, is a long-term care (LTC) insurance policy. LTC covers the cost of nursing home care, an assisted living facility or in-home assistance. The LTC insurance policy cost goes up as you get older so it’s best to explore while in your 50s and healthy.
b. HEALTH SAVINGS ACCOUNT (HSA)
You can open an HSA if your medical plan’s deductible is at least $1,250 ($2,500 for a family). Money is contributed pre-tax and grows tax free, similar to an IRA. As long as the money is used for qualified medical expenses, you will not pay any tax on the funds.
An individual can contribute $3,350 per year (2016). A family can contribute up to $6,650 (2016). There is also a catch-up provision like an IRA that allows you to save an extra $1,000 a year if you’re 55 or older. The IRS lays out the rules in IRS Publication 969.
Advantages of an HSA account:
- You can continue to contribute and accumulate HSA funds from year to year, unlike Flexible Spending Accounts (FSAs).
- HSA funds can be invested, depending on where your account is held (custodian).
- You are the sole owner on the HSA account, it is not tied to your employer.
- Funds can be withdrawn tax-free for qualified medical expenses for life.
Potential disadvantages:
- Check the full schedule of fees and charges and shop around for the right HSA account for you. Fees can include monthly account fees, check-writing fees and other transaction fees.
- Understand the different limitations of the custodian administering your HSA account. Some allow for investing in mutual funds while others are an FDIC-insured saving accounts. Non-bank companies may offer savings accounts that are FDIC insured and some providers have minimum balance requirement before you’re eligible to invest the funds.
Be sure to stay up to date on any changes affecting HSAs, especially related to the Affordable Care Act.
c. Stay Healthy
The simplest way to manage your healthcare costs in retirement is to maintain a healthy lifestyle today. The best thing you can do for your long-term health is to eat well, exercise and sleep. Some healthcare issues will be out of your control but your overall health today is something you can work to improve right now.
Interested in finding out more?
We spend a lot of time with our clients talking about healthcare costs in our retirement planning conversations.
If you’d like to talk more about your retirement preparation, give us a call to schedule a time to discuss your situation and learn more about how we might help.
