5 Ways to Ease the Pain of Health Care Costs in Retirement
The best medicine is to plan ahead for this significant line item in your retirement budget.
This number should hurt a lot: The average 65-year-old couple will pay $240,000 in out-of-pocket costs for health care during retirement, according to Fidelity Investments. And that does not include potential long-term-care costs.
Critical, yes. Incurable, no. The worst thing you can do is take to your bed and expect the pain will go away with an aspirin or two. The best medicine is to make sure your retirement plan takes into account this large line item -- and to find ways to cut future costs or develop income streams to pay expenses.
It's easy to see how the costs can add up. Just Medicare premiums alone for 25 years -- for standard Part B (which pays for outpatient care), a Part D prescription-drug policy and a Medigap supplemental insurance policy -- will set a couple back close to $200,000. And that does not include dental and vision care, hearing aids, and out-of-pocket drug costs. A Medicare Advantage plan could cost somewhat less. Thank goodness Part A, which pays for hospital care, is free.
In your planning, prepare for unexpected spikes in spending, such as a new dental crown. Also, adjust your estimates for inflation, perhaps by 4% a year. And if you expect to live longer than average, plan for those extra years.
Here are some strategies to ease the pain of an acute case of health care costs.
Set up a special fund. You can create a retirement health care kitty with a health savings account. Your contributions are tax-deductible (or pre-tax if through an employer), the money grows tax-deferred, and you can withdraw the money tax-free for medical expenses in any year.
To make HSA contributions in 2016, you must be covered by an HSA-compatible policy with a deductible of at least $1,300 for single coverage or $2,600 for family coverage. You can contribute up to $3,350 for single coverage or $6,750 for family coverage, plus a $1,000 catch-up contribution if you’re 55 or older.
You can no longer contribute once you're on Medicare, but you can use the money to pay for medical expenses at any age. Those costs include deductibles, co-payments, dental expenses and Medicare premiums (but not premiums for Medigap plans).
Make the most of the tax benefits by paying for current medical expenses with cash and letting the money grow in the HSA. If you keep the receipts, you can reimburse yourself from the account for any eligible expenses since you opened the HSA -- even years later. "For folks who are nearing retirement, that's a way to accumulate some real money," says Eric Dowley, senior vice-president of health savings accounts for Fidelity.
Building up their HSA has been a key strategy for Bob and Debbie West of Ellicott City, Md., both 65. For many years, they have worked with spreadsheets estimating retirement expenses, and they predict they will need more than $250,000 for health care. They've been maxing out their HSAs since Bob retired four years ago and bought a high-deductible plan. "The HSA was an additional benefit," he says. "Not only has that been a great deduction at tax time, I now have a nest egg to use for my out-of-pocket medical and dental expenses in retirement." Now enrolled in Medicare, the couple can no longer make HSA contributions.
The savings are eye-catching. Say you contribute the 2016 maximum $7,750 a year from ages 55 to 65, and the money earns 3% a year. At 65, you go on Medicare and don't touch the account for 10 years. At 75, you'll have more than $120,000 tax-free to pay for medical expenses.
Avoid the surcharge. Most Medicare beneficiaries will pay a total of $1,258 for Part B premiums in 2016. But the premium tab will be considerably higher if your adjusted gross income (plus tax-exempt interest) exceeds $85,000 if single or $170,000 if filing jointly. In that case, your premium will range from $2,046 to $4,677 for 2016 per person, depending on the size of your AGI. You'll also pay a surcharge for a Part D drug plan.
Large premiums can throw your retirement financial plan off track. "Most people are unaware of the surcharge," says Ron Mastrogiovanni, chief executive officer of HealthView Services, which helps financial advisers estimate retirement health care costs. "Or they think they won't have to worry about it because they won't be earning that much in retirement." But it's easy to reach the surcharge threshold if you have a taxable pension and are withdrawing money from tax-deferred 401(k)s and IRAs.
Retirees and current beneficiaries can take a number of steps to keep their income under the threshold -- or at least at one of the lower of four premium rungs. One strategy is to build up a tax-free stash of money for retirement. Withdrawals from a Roth IRA, Roth 401(k) or health savings account are not included in your AGI. So it could make sense to contribute to a Roth or an HSA before you enroll in Medicare -- and tap those accounts in years when your AGI threatens to exceed the threshold. You also could gradually convert money from a traditional IRA to a Roth through the years.
Another way to keep your AGI on the lower side is to donate your IRA required minimum distribution to charity. People age 70 1/2 and older can now transfer up to $100,000 from their IRAs to charity each year. The donation isn't included in your AGI.
If you are hit with the surcharge after you retire, consider asking the government to reduce it. The Social Security Administration uses your most recent tax return on file to determine whether you're subject to the surcharge (generally the 2014 return for the 2016 premium). But you may be able to contest the surcharge if your income has dropped since 2014 as a result of a "life-changing event" -- such as a marriage, divorce or retirement. You can ask Social Security to use your more recent income instead. Submit your tax return for the year, or estimate the income if you haven't filed yet.
Save on drugs. It's likely that your drug costs are rising, whether you're covered by Medicare, an employer plan or an individual policy. When choosing a plan, be sure you understand how much you may pay out of pocket. A $20 "co-payment" for a $200 drug will be far less than 20% "co-insurance" for the same drug.
Ask your doctor about generics. Generic drugs can cost 85% less than brand-name versions and usually have a much smaller co-pay -- generally $10 or less for a 30-day supply.
If you shop for your generic drugs at Walmart, Costco or Target, it may cost you less if you pay directly than if you use insurance. A Walgreens prescription savings club also may offer good deals. GoodRx.com provides coupons and helps you search for the pharmacy with the best deal for your medications.
Most insurers, including Part D plans, have preferred pharmacies, which have lower co-pays than other in-network pharmacies. For instance, you may pay a $1 co-pay for a preferred generic at a preferred pharmacy and pay a $10 co-pay for the same preferred generic at an in-network pharmacy. A mail-order pharmacy may cost even less -- but not always.
If there's no generic for your medication, "ask your doctor if there are other medications that are equally effective but may be on a different pricing tier," says Christopher Abbott, chief executive officer of United Healthcare Medicare and Retirement.
Patients who have among the highest costs are those needing "specialty drugs" to treat hepatitis C, multiple sclerosis, rheumatoid arthritis or cancer. A study by the Kaiser Family Foundation found that the average Part D enrollee who takes specialty drugs faces from $4,000 to $12,000 in annual out-of-pocket costs in 2016 for one drug alone.
If you're taking a specialty drug or another high-cost medication, find out if the drug manufacturer has a co-pay assistance program. Most programs are based on income, but some go as high as 500% of the federal poverty level (nearly $80,000 for a couple). Others may kick in if you've spent more than a certain percentage (such as 3%) of your income on out-of-pocket costs for your drugs, says Honora Gabriel, vice-president of the Lash Group, which administers many assistance programs. You can look up programs at www.needymeds.org. Your drug's Web site will likely have information.
Reshop your Part D plan from October 15 to December 7 every year. Your current plan could hike prices or drop a drug from its formulary.
Shop around. If you are on private insurance, one of the best ways to save money is to use doctors and other providers who are in your insurer's network. You may pay 10% of the bill for an in-network doctor, while paying 50% if you go out of network. If you are on a Medicare Advantage plan, you could be stuck with a huge bill if you go outside the network.
You could be in for sticker shock, though, even if you are getting care at an in-network hospital from an in-network surgeon. The radiologist, for example, could be a non-network provider, and you'll be stuck with the bill. Before you schedule a procedure, ask if the surgeon, anesthesiologist, radiologist and other providers are included in your plan's network.
Consider a standalone radiology center for an MRI or x-ray. Such a facility may cost less than imaging at a hospital. Most insurers have online tools to help you compare the costs of imaging and lab tests at in-network facilities. Also, ask your surgeon if he or she performs surgeries at an outpatient surgery center, which typically charges a lower facility fee than a hospital.
If you need emergency care, the average visit at a hospital emergency room runs $700 or more. For less-serious situations, consider an urgent-care center, where the average cost is $135, or a clinic at a pharmacy or similar outlet, which costs about $80 or less.
Using your insurer's online tools, check the price of the provider you're considering against prices of other local providers. At HealthcareBluebook.com, you can find the "fair price" of numerous procedures in your community. You may be able to use this information to negotiate a lower rate.
Save on Medigap. If you choose to go with traditional Medicare, a supplemental insurance policy, which covers co-payments and deductibles, can be worth the cost. A Medigap policy will make your health costs more predictable.
All plans with the same letter designation -- say Plan F or Plan N -- provide the same coverage. But prices among insurers can vary. "I was amazed at the wide range of costs for the exact same plans," says Allen O'Shields of Cataula, Ga., who shopped for plans last year. "Some were double the price of others."
You can compare rates in your area on most state insurance department Web sites (see www.naic.org for links), or you can order a personalized report from Weiss Ratings for $99 at www.weissmedigap.com.
For example, a 68-year-old Michigan man could pay from $1,834 to $4,445 per year for Plan F, the most popular plan, depending on the company, according to Weiss Ratings. Also consider Plan N, which has most of the same coverage as Plan F but requires you to pay the Medicare Part B deductible ($166 in 2016) and a co-payment of $20 per physician visit and $50 per emergency room visit. The 68-year-old man could pay $1,283 for the lowest-cost Plan N, according to Weiss.
Or look into a Medicare Advantage plan, which covers medical and drug costs through a private insurer. You'll have a limited provider network, but you may have lower premiums than buying a Medigap policy and Part D plan.
Create income streams. You should keep a reserve to pay for medical emergencies. That will help you avoid tapping investments in a downturn.
You also should consider developing income streams that can be used to pay for future costs. You can buy an annuity or various insurance products if you worry that Social Security, pension income and retirement savings won't cover all costs.
If you already have life insurance, many policies allow you to accelerate death benefits to pay the costs of a terminal illness. If you still qualify to buy permanent life insurance, consider a policy with a chronic illness rider. Such riders allow you to tap your death benefit early if you need help with two activities of daily living or have cognitive impairment. You may be able to receive up to 2% of the death benefit per month with a $340 daily maximum, and use it to pay for any type of care, even for an unlicensed caregiver, such as a family member, says Byron Udell, chief executive officer of AccuQuote.com. This rider tends to add 10% to 12% to the cost of the policy, but details and costs vary by insurer, he says.
At least part of the payouts from a deferred variable annuity are generally taxable. But you may be able to use part of your investment gains in the annuity tax free to pay the premiums on a long-term-care insurance policy. Ask your insurer about setting up a "1035 exchange." Some insurers, such as Genworth, just have you sign a form to have the money transferred automatically every year.
If your health care expense projections leave you a bit short, you can fill the gap with a deferred income annuity. You invest a certain amount now, and the annuity starts paying out at a certain time in the future -- perhaps in five or ten years or more.
The newest version of the deferred income annuity is a "qualified longevity annuity contract." You can invest up to 25% of your IRA or 401(k) balance in a QLAC (up to $125,000), and the investment isn't included in calculating your required minimum distribution. The later you begin payouts, the more guaranteed income you get, so delaying payouts could be a good move if you have a long life expectancy. If a 60-year-old man invests $125,000 in a New York Life QLAC, for example, he'll receive $84,510 a year for life starting at age 85.