How to Tame Health Care Costs When You Retire
Advance Planning is Critical and May Help Lower Costs
Most of us look forward to retirement as a time to shift gears, worry less, and enjoy a slower pace of life. But that rosy picture can quickly change and include some sticker shock as retirement nears, especially when it comes to paying for health care. Are you prepared to answer these questions?
Five Key Health Care Questions to Consider
1. Who will care for you? Will you need to retire early? Will you need assistance from a family member?
2. Are women prepared to pay more? Since women, on average, live two to three years longer than men, they will need to save more for health care.
3. How long will you live? Assuming you live to age 65, there’s a 50% chance you’ll live to 90 if female, 87 if male, and 94 if you’re a surviving spouse of either gender.
4. Does your retirement income plan factor in health care inflation? Health care inflation outpaced the general rate of inflation by 3% from 2012 to 2016.
5. Can you keep your doctor in retirement? 88% of people have a regular place to get medical care, and 25% of retirees do not relocate in part because they want to be close to medical services they know and trust.
Plan for Rising Costs and a Longer Retirement
The average 65-year-old retiree today should expect to pay around $6,000 a year on health care premiums and out-of-pocket expenses. As life expectancies increase and people spend more years in retirement, the money set aside to pay for health care will have to last longer as well. Clearly, factoring in health expenses has become a critical part of retirement planning. Fortunately, there are steps you can take to ease your mind—and your budget—so you arrive at retirement with fewer worries about managing your health care costs.
1. Understand Your Health Insurance Options
To take control of your health care expenditures, “You need to educate yourself in terms of what your options for health expense coverage are—what you need, where you can get it, and the cost for that coverage,” says Sunit Patel, senior vice president of Fidelity Benefits Consulting. That education starts with understanding what your options for health insurance will be once you retire. For most retirees, leaving full-time employment will mean leaving health care coverage behind. Today, only 24% of firms with 200 or more employees (and just 4% of small firms) still offer retirement health care coverage. Even then, the plan may differ dramatically from its pre-retirement version. There may be different deductibles, co-pays, and other limitations, and you may be sharing a larger portion, or all, of the cost of the premium with your former employer.
Medicare Covers Most Retirees
While some people may have access to employer-provided retiree health care coverage, the government’s Medicare health insurance is still the primary source of coverage for American retirees. Most automatically qualify for basic Medicare hospital insurance (known as Part A) as soon as they reach age 65. This coverage costs nothing if you or your spouse paid Medicare taxes during your working years. On the other hand, Medicare medical insurance (known as Part B), which covers doctors’ services, outpatient hospital care, and some other medical services, such as physical and occupational therapy and some home health care, is not free. You pay a monthly premium for Part B and there’s no annual limit on your out-of-pocket expenses as there is with many private insurance policies. Additionally, you can elect to purchase a Medigap policy for supplemental coverage. Medicare Advantage plans combine Medicare Parts A and B and supplemental coverage into a single policy. They are privately managed and can offer lower premiums or better benefits than a traditional Medicare setup where each part is treated separately. But these plans also can limit you to using only network providers. To cover prescription drugs, you can purchase Medicare Part D prescription coverage to supplement Medicare (Part A and Part B), or a Medicare Advantage Plan (i.e., HMO or PPO). Although selecting coverage from the many private insurance options available in your state to supplement basic Medicare can be time consuming, it can make a big difference in your costs.
What if You Retire Early?
If you retire before age 65, of course, you can’t take advantage of Medicare right away. So if you don’t have other coverage in the interim, you will need to enroll in your own insurance plan, or pay for your medical expenses out of pocket, while you await eligibility for Medicare. In that case, you have a number of options. They include:
• Paying to continue your current employer coverage for a specified time under COBRA
• Joining your spouse’s company health care plan
• Purchasing a private medical insurance policy
• Using Veteran’s Administration benefits, if you are a veteran
• Using Medicaid, if you qualify
As with any important financial purchase, think about the costs and coverage of your policy before you buy it, and look at the premiums you can afford, the deductibles, the available hospitals and doctors, the plan’s quality-ranking information, the covered benefits, and the out-of-pocket expenses you will pay. Higher deductibles generally lower your costs, but require you to pay more up front before your coverage kicks in.
2. Factor Health Care Costs into Your Income Planning
Once you have a better handle on the cost of the insurance coverage you’ll need, you can begin looking at your health care costs along with your other essential retirement expenses. “On the financial side, you want to look closely at your anticipated medical costs as part of your larger income planning goal, because they are such an important and essential expense in retirement,” says Patel. Most online retirement planning tools can help you create a ballpark estimate of how much of your budget for essential expenses should be allocated to medical and other health care costs.
You also can use Fidelity’s annual Retiree Health Care Costs Estimate as a basis for planning. This estimate suggests that a 65-year-old couple retiring in 2020 would need $295,000 to pay for medical expenses throughout their retirement, not including nursing home or long-term care. This figure covers the cost of insurance premiums for Medicare Part B coverage and Part D prescription benefits, plus out-of-pocket expenses for co-pays, deductibles, and miscellaneous home care costs. It doesn’t include additional costs for treating chronic conditions such as heart disease, arthritis, diabetes, or most dental services.
Based on currently available cost estimates, about 15% of the average retiree’s annual expenses will be used for health care-related expenses, including Medicare premiums and out-of-pocket expenses. Another consideration is that 52% of people who reach age 65 will use some form of long-term care. You might want to earmark a portion of your budget for purchasing long-term care (LTC) insurance as well. The cost is based on age, so the earlier you purchase a policy, the lower the annual premiums.
Whatever method you use to estimate your health care expenses, including them in your overall income planning helps you invest that amount appropriately so you can cover health care costs without having to sell or liquidate investments unnecessarily.
3. Take Advantage of All Possible Funding Sources
In addition to any employer-sponsored benefits, your retirement accounts, and personal savings, you may have other sources to help meet health care costs in retirement. For example, if you have a Health Savings Account (HSA) that sets aside pretax money to be used for health care expenses, make sure you factor those assets into your planning calculations. On the other hand, if you haven’t yet taken advantage of your employer’s HSA-compatible health plan, think about using the health plan and an optional HSA to begin saving now on a tax-favored basis. Because you don’t have to use money contributed to an HSA right away it can be set aside to cover qualified medical expenses in retirement—and you’ll be able to withdraw it free of federal income taxes in the future.
Other Sources of Funds that Might be Available to Cover Your Health Care Expenses Include:
• Voluntary Employee Beneficiary Association (VEBA) plans. These are tax-favored trusts often set up to provide health benefits to employees of school districts, colleges and universities, state agencies, and union members.
• Part-time work. Keeping health insurance benefits is one of the leading reasons retirees continue to work.
4. Be a Smart Health Care Consumer
Here are a few ways to make sure you get the most from your health care dollars:
Be prepared. Be ready to give your provider the information that he or she needs—even to the point of writing down your questions or symptoms in advance of each visit. In addition to ensuring that your concerns are addressed efficiently (and you don’t forget something important), this makes the best use of everyone’s time. Because physicians and facilities typically charge based on the time and complexity of a visit, this is even more important if you have a high-deductible health plan where you shoulder more of the up-front costs.
Ask the hard questions. Make sure you get a clear description of any diagnosis and the doctor’s proposed plan of care, free of confusing jargon. Ask about the benefits and risks of any procedures and know what outcomes you can expect. See if any alternative treatments are available and compare the cost and outcomes of those choices too. For example, would an outpatient procedure be a safe, effective, and lower-cost alternative to an overnight stay in a hospital? Would an X-ray be as good as an MRI for the situation? Again, if you’re paying a larger portion of the costs yourself with a high-deductible plan, these decisions can have an immediate effect on your wallet.
Know what you’re paying for. What are the charges, fees, and out-of-pocket costs you should expect for the recommended treatment plan? Are there any factors you should know about that could cause the anticipated expenses to increase? Remember, along with your patient privacy rights, you have the right to know as much as you can about the medical services being recommended, and their costs.
Being a good health care “shopper” may also help you lower your out-of-pocket costs for prescription drugs. Even with improved Part D insurance plans, prescriptions can cost thousands of dollars a year if you’re treating a chronic condition. So check with your doctor or pharmacist to see if there are safe, efficient, and lower-cost alternatives to any brand-name drugs you’re using. Also, don’t assume that your health plan’s distributor offers the best price. Check to see if your plan has a mail order option, which is often more cost effective and typically provides up to three months’ worth of medication at a given time. Planning for health care expenses in retirement has never been more important. By carefully considering your needs, expenses, and financial resources ahead of time you will likely be in a better position to handle the costs when retirement finally arrives.
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