How do you account for rising health care costs in your retirement planning? If you're like most, you're going about it the wrong way.
Although Medicare Part A, which covers some level of hospitalization, is free, the bulk of Medicare coverage is not free. You'll pay premiums. In addition, you'll have out-of-pocket costs as it is estimated Medicare will cover only about 50-60% of your health care needs. Over time, these premiums and out-of-pocket costs will go up.
(See more facts at Healthcare Costs in Retirement.)
How People Forget About Health Care Costs in Their Budget
When I do budgeting for people who are transitioning out of the work force, they frequently forget to budget for health care. Why? Their employer is often picking up the majority of the tab and the remaining cost comes out of their paycheck. They think they need the same amount of take home pay that they currently have but forget that they will now be responsible for paying their healthcare premiums in addition to the out-of-pocket costs.
What Types of Health Care Premiums Will You Have?
There are four types of health care premiums you are likely to have in retirement:
- Medicare Part B premiums
- Medigap (referred to as Medicare Supplemental Insurance) or Medicare Advantage
- Premiums (referred to as Medicare Part C)
- Medicare Part D coverage (drug coverage)
- Long term care premiums
Below are details on each of these items:
- Medicare Part B - In 2012 this runs about $100 a month, but goes up as your income goes up. Unfortunately Medicare won't cover all of your health care costs in retirement.
- If you want insurance for costs that goes beyond 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 will not cover costs for dental, vision and eye care, potentially leaving you with some big expenses, particularly for dental needs.
- 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 come along.
- 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. (See Pros and Cons of 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 healthcare cost calculator by HVS Financial.
Using this calculator, I said I was a male, age 65, and it estimated my 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 may be closer to $675 a month (using a 6% inflation rate).
For a married couple, you need to double those numbers. Ouch.
What Can You Do to Reduce Rising Health Care Costs?
I recently spoke to Dan McGrath of HealthView Services, and he offered several suggestions to help control rising health care costs. First, stay healthy. Second, if you're expecting a higher amount of retirement income, make sure you manage retirement account distributions in a tax efficient way. Third, don't get caught off guard - plan for these costs.
1. Stay Healthy
Dan had some intriguing comments on staying healthy. Two that stuck with me:
- Get 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. Learn more in Periodonal Disease and Your Heart Health.
- Go barefoot. Yes, barefoot. Learn more in Barefoot Running and Barefeet in Medicine.
- I would add to the list to be leery of too many prescriptions. Seriously, who wants a long, unhealthy life? Take charge of your medical care. Do research. Ask questions.
2. Manage Distributions Tax Efficiently
Dan also had many thoughtful comments about managing account distributions in a tax efficient manner.
For high income taxpayers (for 2012 that means singles with expected income of $85k or more, marrieds at $170k or more), the more you make, the higher your Medicare Part B premiums and the higher your Medicare Part D premiums. If you work with a good tax planner or retirement planner you can use the following ideas to manage distributions more tax efficiently, and potentially keep your premiums from rising as much:
- Distributions from HSA accounts, ROTH IRA accounts or from cash value life insurance policies don't count in the formula that determines the final amount of your Medicare Part B premium. Income from a reverse mortgage doesn't count either.
- Money withdrawn from traditional retirement accounts can often be offset with deductible healthcare expenses.
- Since ROTH IRA withdrawals don't count in the formula that may increase your Medicare Part B premiums, 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, and you may want to consider converting part of your IRA to a ROTH before you reach age 65. In particular, Dan said the "ROTH is the greatest investment vehicle known to people" and I must stay I agree with him.
3. 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 retiring early (before 65) make sure you understand the cost of carrying your own health insurance premiums until you reach Medicare age. This is one of the three things I discuss in 3 Things to Consider Before You Retire at 55.