The following is adapted from Keep It Simple, Make It Big.
Surprise! You will spend more on healthcare in retirement than before. According to the Bureau of Labor Statistics, households headed by people age 25 to 34 spent just over $250 a month out-of-pocket on healthcare in 2017. This jumped to more than $500 a month on average by age 65.
Really, this isn’t that surprising. While many expenses (like housing costs, if you’ve finished paying your mortgage) will likely decrease by the time you retire, healthcare is one you can expect to increase as you age.
You might think that Medicare will be enough to cover your increased costs, but it’s not. It’s only one prong in the ideal three-pronged approach: Medicare, long-term care insurance, and a health savings account (HSA).
#1: Medicare
Medicare is the national health insurance program for senior citizens. It is a key prong in your health insurance approach, so here’s a quick guide to the ABCD’s of Medicare.
Medicare Part A is mandatory, funded by payroll taxes, and covers hospital use. It’s not comprehensive, and seniors need to be aware of its limitations. Here are some key details as of 2020:
It has a per-benefit period deductible, $1,408.
If you are in a hospital more than 60 days, you must pay $352 a day in co-insurance.
For hospital stays 90 to 150 days, the coinsurance is $704 a day.
Over 150 days, it pays nothing.
It doesn’t pay for care needed while traveling out of the country.
It doesn’t pay for blood.
It doesn’t cover out-patient prescription drugs.
Medicare Part B is often referred to as physician insurance. It is optional but highly subsidized by the general taxpayer. Its monthly premium is deducted from your Social Security check. It is $144.60 a month in 2020. It too has limitations, including:
The annual deductible is $198.
There is a co-insurance payment of 20 percent.
It doesn’t cover dental care.
It doesn’t cover eyeglasses, hearing aids, or eye exams.
Medicare Part C, or Medicare Advantage (formerly Medicare+Choice), allows seniors to choose an HMO, PPO, or HSA company to provide the combined benefits of Part A and Part B. Plans can offer more comprehensive benefits, and most do. They can charge for them, and many do.
The benefit of Part C is that it eliminates the need for Medigap Coverage (a highly regulated supplement to cover the gaps in Part A and Part B programs, with an average premium of $155).
Medicare Advantage programs are not available everywhere and are more prevalent in densely populated areas.
Medicare Part D is the drug benefit plan. It is voluntary and has some restrictions:
Seniors with incomes greater than $12,123 must pay a monthly premium ($32.50 on average).
They will pay a maximum deductible of $435. Part D will then cover 75 percent of drug costs between the deductible and $6,350.
With total spending over $6,350, Medicare will cover 95 percent.
In addition, a $2 co-pay applies for generic drugs and $5 co-pay applies for brand-name drugs. If you’re in a nursing home, co-pays are waived.
All in, an average person might pay $332 for Medicare monthly ($144.60 for Medicare B, $32.50 for Medicare D, and $155 for Medigap).
#2: Long-Term Care Insurance
An American’s largest risk in retirement is outliving his or her money, and for most Americans, if they are forced to pay for the custodial care of a spouse or themselves, they have a good chance of running out of money.
The average cost of home healthcare workers is $22 an hour nationally, and the average annual cost of nursing-home care in the United States is $89,297 a year for a semi-private room and $100,375 for a private room. It’s much higher in many places. In New York, for example, the average cost of a semi-private room is $145,088.
Do you have an extra $100,000 in your annual retirement budget to pay for a second residence or house staff? If not, you need to consider transferring a portion of this risk.
Long-term care insurance, either as a standalone plan or as a rider on a life insurance or annuity contract, provides tax-free money to pay for a person’s custodial care should they have trouble performing two of five basic activities of daily living (toileting, bathing, dressing, eating, and transferring) or if they suffer from a brain disease such as Alzheimer’s.
Long-term care insurance is necessary because Medicare will not pay for custodial care. Medicare will pay for skilled in-patient rehabilitative care, provided some restrictions are met, but it will pay for non-rehabilitative home care, adult day care, assisted living, or skilled nursing facilities over one hundred days.
#3: Health Savings Account (HSA)
For those who have time to plan, health savings accounts (HSAs) are often an attractive option for early retirees. They combine a high-deductible catastrophic insurance policy with a double-ended tax-free IRA.
Here are the important details:
Insurance kicks in after you pay a minimum deductible of $1,350 for an individual or $2,700 for a family.
Individuals can contribute an amount up to $3,550 to a savings account in 2020. The limit is double for families. If a person is over 55, they can contribute another $1,000. That is the limit for both individual and family plans.
The maximum 2020 out-of-pocket, including deductibles and co-payments but excluding premiums, is $6,900 for an individual and $13,800 for a family.
The reason an HSA is an attractive option is it’s triple-tax free. The contributions are pre-tax, meaning they lower your taxable income. Then, there are no federal taxes on the year-to-year income and gains. Finally, as long as you spend the money on qualified healthcare costs, there are no federal taxes when it’s spent either.
These plans can be a great relative value for many Americans, as they allow people to pay lower premiums, invest the savings in a tax-free account, and accumulate it for the future when the money will be needed. Then, once on Medicare, they can continue using the account—they just can’t put any new money in.
However, these plans must be compared to others available in the marketplace and matched to your unique health needs. The investment features are great, but they should be secondary considerations to your overall healthcare needs.
Preparing for Your Healthcare Needs
Much of retirement planning is preparing for the unknown, but one certainty is that your healthcare costs will increase, so it’s important to plan for this eventuality.
Medicare will cover a lot of your healthcare needs, but not everything. To avoid being blindsided and bankrupted by unexpected costs, take a three-pronged approach that combines Medicare with long-term care insurance and potentially a tax-advantaged HSA, if it works for your healthcare needs.
For more advice on preparing for healthcare costs in retirement, you can find Keep It Simple, Make It Big on Amazon.
Michael Lynch is a Certified Financial Planner with nearly twenty years of experience working with American families to craft plans that fund their dreams, educate their children, and finance their retirement. Michael has contributed to the Wall Street Journal and Investor’s Business Daily, and hosted Smart Money Radio for a decade. He’s served as an adjunct faculty member at Fairfield University and currently teaches financial planning to employees of corporations like Madison Square Garden and Yale New Haven Health Systems. Michael is a five-time Financial Planner of the Year for MetLife and a 2019 inductee to the Barnum Financial Group Hall of Fame. You can enjoy his latest articles and videos at www.michaelwlynch.com.
Some health insurance products offered by unaffiliated insurers. Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Michael Lynch is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. www.SIPC.org 6 Corporate Drive, Shelton CT 06484 CRN202210-272650