Healthcare Costs in Retirement – Don’t Make this Big Mistake
If you were hoping to read about healthcare costs in early retirement, I had a guest post on that last year, and I plan to share more as I learn what’s going to work best for my family and me. I should have an answer later this summer, but I’ve got a pretty good idea of which direction we’ll be taking.
When Dr. Jim Dahle spoke at WCICon a year ago, he gave an overview of the current state of Medicare and the costs involved. I was honestly surprised to learn today’s retirees need to budget somewhere between $5,000 and $10,000 for healthcare even when insured by Medicare. It’s complex, and still quite expensive!
Our guest post today is from Danielle Kunkle Roberts; she knows far more about Medicare than I do. We have no financial relationship and her brief bio is below:
Danielle K Roberts is the co-founder of Boomer Benefits where she and her team help baby boomers navigate their Medicare insurance options. She is a member of the Forbes Finance Council and writes frequently about Medicare, retirement and personal finance.
Healthcare Costs in Retirement – Don’t Make this Big Mistake
Over the years in my career as the co-owner of a Medicare insurance agency, I have noticed a pattern. People reach Medicare age and are starry-eyed over quitting their jobs and planning some world travel or time with family and friends. Then they sit down to set up their Medicare benefits are blown away by the expense of it all.
It can put a real damper on your retirement if you haven’t saved money for future healthcare costs.
Data from a recent study backs my observation, nearly 80% of middle-income baby boomers stated that they had not set aside a single dime for healthcare in retirement.
When considering the financial categories that need to be built up for retirement, we simply don’t consider the cost of healthcare after 65 as a major category.
Why? Because we will have Medicare, of course!
That is where one of the biggest retirement mistakes begins.
Though many of you are outliers on your journey to early retirement, there are important healthcare costs to calculate in your financial plan for life after 65.
Don’t Fall for This Medicare Myth
Myth: I’ve been paying for Medicare my whole life; it will be free when I retire.
It is easy to see the FICA deductions on your paycheck and assume you are paying-in-full for healthcare in the future.
While partially true, you are only paying for one part of your healthcare in retirement through your FICA deductions. Those taxes are funding your Medicare Part A hospital benefits.
After enrolling into Medicare Parts B and D, you will pay monthly premiums along with deductibles, copays and coinsurance much like you would with traditional insurance.
So, now that you know Medicare will not be free, let’s take a closer look at the different parts of Medicare and the costs associated.
Medicare Part A
I like to tell my clients to think of Part A as coverage for your room and board in the hospital. This part of Medicare provides you a place to stay and meals while you’re there receiving medical services.
The majority of Medicare beneficiaries qualify for premium-free Part A (this is from those FICA taxes we talked about). To qualify, you need to have worked 10+ years (40 quarters) in the United States (or be married to someone who did have those quarters and is at least age 62 and eligible for Social Security).
If you have not worked the minimum requirement, the monthly premium for Medicare Part A would be well over $400. Though, if you worked less 40 quarters but more than 30 quarters, your Part A premium would be about half that because it would be pro-rated.
Medicare Part B
Part B of Medicare covers outpatient services that are medically necessary. Part B coverage includes services like doctor visits, lab testing, diagnostic imaging, preventive care, surgeries, ambulance rides, chemotherapy, and dialysis care for people with renal failure.
The Social Security office will go back two years and look at your tax returns from that year to determine your premium.
Your MAGI consists of any money earned through wages, interest, investments, or capital gains. Additionally, Social Security benefits and tax-deferred pensions will also be included in this number.
If you filed jointly with a spouse, Social Security will base your premiums on your combined MAGI and base both of your premiums accordingly. Social Security will use your household income to determine which column you would be in on the Part B premiums chart.
Medicare Part D
Part D is implemented and regulated by the Federal Government to lower the cost of your retail prescription drugs.
Your income will determine your Part D premium in the same way it did with Part B. These premiums will vary by plan as each state may have 20 or more plans to choose from.
In most states, you can find plans that start around $15 a month. If you are in a higher income bracket, Social Security will tack on an income adjustment to that premium as well.
Medicare Supplement Plans
Medicare Supplement plans are a type of add-on plan for your Original Medicare. This type of plan is also known as Medigap. Medigap plans help to cut the amount of out-of-pocket costs Medicare leaves behind for you to pay.
There are 10 available standardized Medigap plans as of 2019, though two of these plans – Plan C and Plan F – will be phased out for new enrollees as of 2020. Medigap plans are required to offer the same coverage regardless of what carrier they are purchased through. So for example, your benefits for Plan G are the same with one company as they would be with another.
With that said, what you will want to look at when finalizing your Medigap plan decision is the monthly premium. Once you have decided which plan offers the best coverage for you, shop around to find a carrier with the lowest premium and best average rate increases.
Out of all the Medigap policies, Plans F, G, and N are the most popular.
The average price for a Medigap plan for someone aging into Medicare is about $100 to $150 per month her in the state of Texas and in many other states. However, the cost of healthcare by region can greatly affect the price, so beneficiaries in states like Washington and Florida pay considerably more. Keep in mind that Medigap premiums are also based on many things such as age, gender, location, choice of plan, and tobacco usage.
Medicare Advantage Plans
Are you wondering why Part C was missing in the sequence of events above? Most people know “Part C” of Medicare as Medicare Advantage. Medicare Advantage plans are just another name for private Medicare insurance.
Medicare Advantage plans are private health plans in which you can get health coverage from instead of Original Medicare. You would get your Part A, Part B, and sometimes also Part D all from one insurance carrier.
The cost of these plans varies but is generally lower than what you pay for a Medicare Supplement plan. Many people are attracted by the plans that offer a zero-dollar premium. The national average premium for Medicare Advantage plans currently hovers around $30 a month.
Build a Medicare Nest-Egg
Now that you have digested the different parts of Medicare, let’s look at designing a plan to pay for them. Whether you plan to retire in 5 years or 25 years, the most important step to take is setting aside a fund specifically for healthcare in retirement.
Where is the best place to stash this money? A health savings account, if you are eligible to open one.
The Benefits of a Health Savings Account
If you are enrolled in a qualified high deductible insurance plan, setting up an HSA is a no-brainer. An HSA is a savings account meant to help pay for qualified medical expenses. Money contributed to this account is on a pre-tax basis.
An individual in 2019 can contribute a max of $3,500. The maximum allowed amount for families is $7,000 in 2019. If you are 55 or older, you can contribute up to $1,000 on top of that every year.
When you add money to your HSA, you are also getting a tax break. You don’t have to pay FICA taxes or ordinary income taxes on your HSA contributions. This is just one of the reasons why everyone should consider an HSA as a way to save for health care costs in retirement.
How HSA Funds Can Be Used
Money contributed to your HSA can be used to pay for a variety of medical expenses. A great example of services that won’t be covered by Medicare but can be paid for with an HSA, is routine dental care and vision services.
Another way you can use your HSA funds is by investing them in things such as stocks and mutual funds. Doing this can help grow your total HSA funds over time through accrued interest.
If you find yourself needing the money for non-medical expenses and are at least 65 years old, you can withdraw money from your account with no penalty. Though non-medical withdrawals will leave you paying income tax that you would otherwise bypass if the funds were used for medical expenses.
How Health Savings Accounts Work with Medicare
After enrolling in any part of Medicare, you are no longer allowed to contribute to your HSA. This means you would need to delay Medicare if you wanted to continue to contribute into your HSA past age 65. However, you will also face a penalty for delaying Medicare unless you have creditable coverage, such as that through a large employer group health plan.
The good news is that if you have a spouse who isn’t of Medicare age yet and has an HSA under their name, they can still contribute the maximum allowed amount for families.
Tackle Your Savings
Saving for retirement can seem like an intimidating project, especially if you are trying to prepare for it in an untraditional amount of time. However, if you are taking healthcare costs into account now, you will be able to set yourself on a trajectory to have plenty set aside for health care no matter when you choose to retire.
Have you planned for healthcare spending after age 65? How much do you budget for these expenses? Do you plan to keep an HSA past age 65?