How to Plan for Health Care Costs in Retirement
How do you account for health care costs in your retirement planning? If you're like most, you are underestimating these expenses.
Although Medicare Part A, which covers some level of hospitalization, is free (assuming you worked in the U.S. long enough to qualify), the bulk of Medicare coverage is not free. You'll pay premiums for Medicare Part B, and for supplemental insurance or prescription plans. In addition, you'll have out-of-pocket costs.
When you factor all of this in, it is estimated Medicare will cover only about 50-60% of your healthcare needs. And, over time, premiums and out-of-pocket costs will go up.
People Forget About Health Care Costs
Many retirees and people getting ready to transition out of the workforce forget to budget for healthcare when they estimate their expenses in retirement. Why? Their employer is often picking up the majority of the tab (usually about 75%) and the remaining cost (average is about 25%) comes out of their paycheck. They think they need the same amount of take-home pay that they currently have, but they forget that they will now be responsible for paying their health care premiums in addition to the out-of-pocket costs.
Types of Health Care Premiums
There are four types of health care premiums you are likely to have in retirement:
Medicare Part B: This goes up as your income goes up. In 2018, if you made under $85,000, you would pay $134 per month. If you made more, you would pay more.
Medigap (referred to as Medicare Supplemental Insurance) or Medicare If you want insurance for costs that are not covered by basic Medicare you'll look at buying either a Medigap policy or a Medicare Advantage Plan, as well as prescription drug coverage. If you have a Medigap policy, it may not cover costs for dental, vision and eye care, potentially leaving you with some big expenses, particularly for dental needs.
Advantage Premiums (referred to as Medicare Part C) If you have a Medicare Advantage policy which includes dental, vision, and eye care, it may not provide as much additional hospitalization coverage, potentially leaving you and your family with a big bill should a chronic or severe illness comes along.
Medicare Part D coverage (drug coverage) includes prescription drugs for self-administration. Drugs administered by a professional like a nurse or physician will usually fall under Medicare Part B coverage. Those covered with Part D coverage will pay a co-pay per prescription. Also, some drugs are excluded from coverage.
Long-term care insurance premiums Medicare does not cover the majority of long-term care costs you might experience. If you want to be assured you have funds to cover these costs, consider long-term care insurance.
So how much might such coverage and the associated out-of-pocket costs add up to?
What Amount of Total Health Care Costs Might You Experience?
For an estimate of your own current and future health care costs try the online health care cost calculator by HVS Financial.
For a male, age 65, the calculator estimated total premiums and out-of-pocket costs at about $4,500 a year. That means if you haven't put about $375 a month into your budget for health care costs, you're going to find yourself short on cash. It's also likely that these healthcare costs will rise at about double the rate of inflation, which means ten years into retirement that $375 a month can be closer to $675 a month (using a 6% inflation rate).
For a married couple, you need to double those numbers. Ouch.
Many physicians encourage patients to lead a healthy lifestyle to avoid the burden of mounting medical bills. Take charge of your medical care. Do the research and ask questions. You will also want to have a good dentist, and go see them every six months. Cardiovascular disease shows up in your gums first. A dentist that pays attention may notice something long before your doctor does.
Manage Distributions Tax-efficiently
For high-income taxpayers (for 2018 that means singles with expected income of $85k or more, or married couples at $170k or more), the more you make, the higher your Medicare Part B premiums and the higher your Medicare Part D premiums. Work with a good tax planner or retirement planner to manage distributions more tax efficiently, and potentially keep your Medicare premiums from rising.
Distributions from HSA accounts, Roth IRA accounts or from cash value life insurance policies don't count in the Medicare formula that determines the final amount of your Medicare Part B premiums. Income from a reverse mortgage doesn't count either. Money withdrawn from traditional retirement accounts can often be offset with deductible health care expenses.
If you have large balances in traditional IRAs that means you will have a significant amount of required minimum distributions at age 70 and beyond. You may want to consider converting part of your IRA to a Roth before you reach age 65.
Don't Get Caught Off-Guard
Rising health care costs are going to be a reality. Make a line item in your budget for them. If you plan on retiring early (before 65) make sure you understand the cost of carrying your own health insurance premiums until you reach Medicare age.