Retirement


A Prescription to Pay Retiree Health Costs

Northwestern Mutual offers the example of a 65-year-old man who paid annual premiums of $1,717 for 40 years into a whole-life policy. The policy has a cash value of $389,012. If he needs money, he can claim the cash value ($68,680 will be tax-free) or take a lifetime annual payment of $27,593. Or the policyholder can stop paying premiums, keep the policy and take dividends in cash rather than reinvesting them.

Sock away cash. If you qualify, a health savings account is a great way to build up a nest egg for health care costs in retirement. Although you can't contribute to an HSA once you enroll in Medicare, you can withdraw the accumulated funds in the account tax-free for medical expenses, such as Medicare premiums, drugs and long-term-care insurance premiums. However, you cannot use the account to buy a Medigap policy. You can tap the account for nonmedical expenses, but you will have to pay tax on the withdrawals.

If you have not enrolled in Medicare and already have an HSA, it pays over the long term to make the maximum contribution. In 2012, the contribution limits are $3,100 for an individual and $6,250 for a family -- plus you get to contribute an extra $1,000 if you're 55 or over. Contributions are tax-deductible or can be made with pretax dollars. To qualify, your health insurance policy must be deemed to be "HSA compatible" and have a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage.

Invest the money to grow over time. Fidelity offers this example. A 55-year-old couple contributes the maximum $7,250 each year (adjusted for inflation) for ten years in a portfolio of 50% stocks and 50% bonds and cash. Assuming average market conditions, they'll likely have $94,000 by age 65 in tax-free money to pay for medical expenses.

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Retiree Pat Hanratty and her husband, Mike, have been tapping their HSA for medical expenses since they opened the account two years ago. Over the two years, the Troy, Mich., couple has contributed $9,200 and has spent $6,400 -- on prescription drugs, eye exams, physicals and dental work.

Pat, 64, a retired legal secretary, is covered by a retiree medical plan. Mike, 61, is self-employed. The two will continue to fund the HSA until they enroll in Medicare. "We're not in a high tax bracket, but you have to save every penny you can," she says.

Reduce spending. Whether you're in retirement or approaching it, you can take a scalpel to your health care spending. You can reap big savings without having to delay needed treatments or reduce drug dosages.

If you're enrolling in traditional Medicare, buying a Medigap policy "is an excellent way to keep volatility out of expenses," says Northwestern Mutual's Barsch. You also can find savings each year during Medicare open enrollment by scrutinizing Part D drug and Medicare Advantage plans.

Also make the most of free Medicare services. Backed by research that shows that preventive care as well as exercise and other healthy habits reduce health care costs, Medicare offers free coverage for 20 preventive services. They include an annual wellness exam; screenings for colorectal, prostate and breast cancer; and flu and pneumococcal vaccines.

If you're still employed, your health plan also may offer free screenings and other financial incentives to stay healthy. Many companies provide premium discounts or gift cards to employees who take health assessments and who seek help from a "health coach" to manage chronic conditions, such as diabetes and high cholesterol, says Chad Wilkins, chief executive officer of OptumHealth Financial Services, which administers HSAs and other corporate wellness programs.

You also can save a bundle by using in-network providers. FAIR Health, a nonprofit that keeps a database on out-of-network reimbursement rates, offers the following scenario. Your PPO allows the in-network provider to charge $10,000 for a surgical procedure. The insurance company has a $500 deductible, picks up 80% of the balance and limits your out-of-pocket costs to $2,000. Your total cost: $2,000.

Compare that to an out-of-network provider that charges $15,000 for the procedure. After the $500 deductible, your insurer picks up 70% of the cost up to $10,000. Your total cost: $8,350.

If you're paying out of pocket or face a big co-payment, negotiate on price before any major procedure. It's good to be armed with pricing information. A hospital's sticker price will likely be higher than the insurer's reimbursement. At Healthcare Blue Book (www.healthcarebluebook.com), you can find a "fair price" for surgical procedures, lab tests, doctor and dental services, and even hearing aids. These prices are based on what many high-quality providers in your area accept from insurers. You can also use FAIR Health's Consumer Cost Lookup (www.fairhealthconsumer.org) to find estimated provider charges for hundreds of procedures.

Tap home equity. You can take out a reverse mortgage to pay for expenses, such as home health expenses, dental care or out-of-pocket drug costs. The loan must be repaid with interest when a homeowner dies, sells the house, or moves out for 12 months or more. Tread carefully: If you use a good portion of your home equity early, you might not have enough left, after interest payments, if you must move later into an assisted-living or nursing facility.

The big downside of a reverse mortgage, known as a home equity conversion mortgage (HECM), had been its big upfront costs. But the HECM Saver, which was introduced a year ago, reduced those costs, providing a decent option for cash-strapped homeowners who face steep medical costs, says Barbara Stucki, a vice-president of the National Council on Aging.

The Saver provides a smaller loan amount than the traditional reverse mortgage, called the HECM Standard. But its upfront fees are considerably smaller, and some lenders have eliminated them. The best move for paying medical expenses is to take the money as a line of credit. "If you draw down slowly, you're only paying interest on what you are using," says Stucki.

Stucki warns, however, not to use a reverse mortgage to pay for a spouse's nursing-home costs. With nursing-home fees averaging $7,200 a month, "you are going to burn through equity very rapidly," she says.

Nor is it wise to use loan proceeds to pay for long-term-care insurance premiums. It's a costly proposition: You're paying loan fees on top of premium costs. Plus, if you need to pay premiums for 20 or more years, you could run out of loan money and then need to drop the policy, Stucki says.

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