ASK KIM


Cut Your Retirement Health-Care Costs

Kimberly Lankford

I'm retiring at age 60 and my biggest expense will be medical insurance. How can I reduce this cost?



I'm retiring at age 60 and my biggest expense will be medical insurance. How can I reduce this cost?

You won't be eligible for Medicare until age 65, but you have several other options until then.

First, see if you qualify for any retiree health insurance from your former employer. If coverage is available, that's usually your best bet. If not, you can still continue coverage for up to 18 months after you leave your job through COBRA, a federal law that requires employers with 20 or more employees to let you stay on the employer plan for a limited time after you leave the group. This coverage, however, can be very expensive -- many employers generally cover 75% or more of their employees' premiums. When you're on COBRA, you have to foot 100% of the bill yourself, plus up to 2% in administrative charges.

If you have any medical problems, COBRA can be your best choice because insurers can't reject your or charge a higher rate because of your health condition. But otherwise you might find a better deal on your own.

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As long as you're relatively healthy and live in a state with a competitive health insurance marketplace (not New York or New Jersey, for example), an individual health insurance policy may cost a lot less than you'd expect. The average premium is $4,185 per year for people age 60 to 64 buying single coverage and $7,248 for family coverage, according to America's Health Insurance Plans, a trade group for health insurers.

And you can cut your costs even further by buying a high-deductible health insurance policy and opening up a health savings account. Almost anyone under age 65 who buys a qualified health insurance policy with a deductible of at least $1,050 for individuals or $2,100 for families can open an HSA. These accounts let you set aside pretax money up to the amount of the deductible (with an annual maximum of $2,700 for singles or $5,450 for families, plus an extra $700 if you're 55 or older). You can use the money tax-free for medical expenses, and anything left over grows tax-deferred. You can use the money for anything after age 65 without penalty, but you will owe income taxes on any money that isn't used for medical expenses.

In many cases, the cost savings from buying a high-deductible policy more than makes up for the higher out-of-pocket medical expenses you may have to pay, especially considering that most people usually don't spend their full deductible. And the tax benefits give it an added boost. It's one of the only ways you can set aside pre-tax money that grows tax-deferred and is available tax-free, regardless of your income level. And unlike a flexible-spending account at work, you don't need to use the money by the end of the year. Instead, it can accumulate for future medical expenses -- whether you're younger or older than age 65. Or if you have extra cash on hand, you can use that money for your medical expenses and keep the HSA funds in the account and make the most of the long-term tax-free growth.

You can use the money for all kinds of medical expenses that aren't covered by your insurance policy, including your deductible, co-payments and other out-of-pocket costs. And there are plenty of things to spend it on even after you turn 65 and qualify for Medicare, including your Medicare premiums and copays for Parts A, B, C or D (the prescription drug plan). You can also use the money to pay for qualified long-term care insurance. But you can't use it to pay medigap premiums.

For help finding an individual health insurance policy, go to eHealthInsurance.com or find a local health insurance broker in your area through the National Association of Health Underwriters.

For lists of companies that provide HSA-eligible policies, go to HSAInsider.com, HealthDecisions.org, and HSAFinder.com.

Got a question? Ask Kim at askkim@kiplinger.com.




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