Healthcare In Retirement

The number one worry for most baby boomers is no longer running out of money, it is now figuring out how they are going to deal with medical costs in retirement according to a survey by PWC.1 Since 1999, healthcare costs have gone up by over 230% while inflation has risen roughly 50% and wages only 68%.2

Health care costs are one of the largest expenses' individuals face in retirement it is the only component of household expenses that increases with age. For example, in 2015, average annual out-of-pocket healthcare expenses for a household between ages 65 and 74 was a little over 42 hundred dollars ($4,383), which accounted for about 11% of total household expenses. For households ages 85 and older, the average out-of-pocket healthcare expense increased to over 66 hundred dollar ($6,603), capturing 19% of household expenses.3

Not only can healthcare expenses take a significant percentage of your income, it can just end up being a lot of money overall.  in fact, according to HealthView Services, a healthy 65-year-old couple retiring in 2021, will spend about $662,156 on their healthcare costs throughout retirement.4 I checked, and this study was denominated in dollars and HealthView Services utilized healthcare claims from 530 million individual cases, as well as actuarial and government data, to forecast retirement healthcare costs. So, this isn’t some hundred-person family feud poll and I could only imagine that if there was a question about trying to guess the total cost of healthcare throughout retirement, I’d go out on a limb and say 662 thousand isn’t hitting the board.

Leading up to retirement, a majority of people have health insurance through their employer sponsored plan which is why it can be confusing when thinking about what to do about insurance when you leave your employer. It’s usually easy to sign up at work, your options are often limited, it is usually simplified by automatic pay deductions. For some, they might have spent the majority of their career at the same employer where medical insurance was pretty turn-key every year and there little to no effort needed. So going out on your own might be like a kid going off to college learning how to do laundry for the first time.

Transitioning Into Retirement

So how do you transition from an employer sponsored plan to your retirement health insurance? What options do you have?

For those who wait until at least age 65 to retire, it’s not too complicated. That is because once someone turns 65, they are generally eligible to get coverage under Medicare. you should be eligible for Medicare at the age of 65 if:

You are a U.S. citizen or legal resident, and

You have resided in the United States for a minimum of five years

Worked at least 10 years in Medicare-covered employment

Most individuals should consider enrolling during their initial enrollment period (IEP). This is the 7-month period around their 65th birthday. The 3 months prior, your actual birthday month and the 3 months after. So it is really designed for the person who celebrates their birthday week… now you get 7 months. If you’re already receiving benefits from Social Security, you’ll automatically get Part A and Part B starting the first day of the month you turn 65. The key mistake to avoid is failing to sign up for Medicare at the right time. This can lead to late-enrollment penalties on the premiums you pay. The most expensive late-enrollment penalty is for Medicare Part B, it is equal to 10% of the standard Part B premium for each 12 months of delay--and this is a lifetime penalty.

The major exception to the mandatory signup at age 65 is for people who are still actively employed at that age. They can delay enrollment in Medicare--as long as they are actively employed. The key word here is "actively." A problem that often crops up involves people who have been laid off from work and are using COBRA coverage. They sometimes assume that COBRA coverage qualifies them to decline Medicare at age 65--and that is not correct.

There is one other exception to the active employment exemption: people who work for organizations with 20 or fewer employees. In those cases, Medicare becomes primary regardless of whether the employer offers health insurance to its employees.

Understanding Medicare

When it comes to Medicare, there are two options you have, Traditional Medicare or Medicare Advantage

Now traditional Medicare comes in 3 parts; Part A, Part B and Part D and each of those parts have their own separate premiums.

Part A is free, assuming you paid Medicare payroll taxes while working. Part A provides inpatient care in hospitals, skilled nursing facility care, hospice care, and home healthcare. For long-term care in a nursing home, you pay nothing for first 20 days of each benefit period, a coinsurance for days 21–100 of each benefit period, and all costs for each day after 100 days in a benefit period.

Medicare Part B this is what you think of when you think of Medical Insurance. Part B helps cover medically doctors’ services, outpatient care, home health services, and more. Part B also covers many preventive services, and you pay nothing for most covered preventive services if you get the services from a provider who accepts assignment. For 2021, Medicare Part B premiums start out at $148.5 a month. However, at higher incomes certain retirees may pay higher premiums.

Medicare Part D

Which is prescription drug coverage This varies depending on your income and the plan you choose, but the nationwide base premium is $33.06 per month for 2021.5

With a total monthly cost of Medicare averaging a little over $180, you get a pretty well-rounded plan. Now this does just cover the actual premiums and things like deductibles and coinsurance may apply when you go to use the care. Now regardless of your income, Medicare Part A is generally free. Your income comes into play when determining the cost for parts B and D. On the highest end of the spectrum, your total premium would be 504.9 for Part B and a little over $110 for Part D. So, in total, for the highest income earners, it would be just about $615 for Medicare.

Because traditional Medicare does not cover things like dental or vision, and because it includes deductibles and coinsurance that could lead to significant out-of-pocket expenses in retirement, many retirees opt for supplemental insurance otherwise known as Medigap to cover these costs as Medicare covers less than 2/3 of health care expenses in retirement.6

The other Medicare option is for those that wish to opt out of traditional Medicare. They can instead enroll in Medicare Part C, or otherwise known as Medicare Advantage Plans. These plans are offered through private insurers and typically provide all of the benefits of traditional Medicare parts A, and B and sometimes D in one policy and often include the things that traditional Medicare does not cover such as dental or vision coverage. While this is usually a lower cost alternative, the difference is that it comes with a limited network of healthcare providers. They are very similar to HMOs or PPOs that you may be familiar with.

As you can see, retiring at 65 makes for a fairly easy transition due to Medicare. However, not everybody wants to wait until 65 to retire. In fact, 46% of retirees say they retired earlier than expected.7 Which happens to be the same percentage of people in a recent poll8 that would support The Rock as President. Could you image if this is uttered at a Presidential Rally

I guess we have a few years to see if that happens, for now, back to early retirement.

Retirement Before Medicare

So, what are your options if you retire before 65 and your employer does not offer retirement medical benefits?  

One of those options may be to continue the coverage you have with your existing employer. Most employers with more than 20 employees offer the option to continue your existing health insurance coverage through COBRA. You will be responsible for the entire premium and depending on what your employer covers as a benefit; you may see your premiums be much higher than you are used to.

COBRA benefits are not permanent, most often, they last up to 18 months. So, to successfully bridge the gap until Medicare, you would have to retire at 63.5 or later to ensure there is no gap in coverage. While COBRA benefits typically last 18 months, there are circumstances that would allow for that 18-month window to be extended to either 29 if a qualified beneficiary is disabled or 36 months if you separate from your employer between 65 and 66.5. This extension would allow for you to be on Medicare while a younger spouse or dependent child remain on Cobra if needed.

An additional option for some retirees is to “convert” their group health insurance policy into their own individual health insurance plan if it is an option offered by the plan. Unlike COBRA continuation coverage the terms of a conversion policy do not have to be the same as your old policy. The premiums can go up and the level of coverage may go down. That is why it is important to look at all of your options because most people don’t want to pay more for less unless we are talking about that banana art that somehow sold a few years ago for over 100K.

If you are not yet eligible for Medicare and choose to not continue your coverage, another option is to purchase health insurance via the healthcare exchange. This option makes sense for those who find COBRA too expensive or have exhausted their COBRA coverage and are still not old enough to enroll in Medicare. Some people may find this to be a better alternative because they may receive premium assistance tax credit subsidies due to low income. A good thing about the exchange is that you cannot be denied coverage for a pre-existing condition.

One thing to keep in mind is that coverage can only be purchased during an enrollment period. For those looking to insure via the exchange, there is a 60-day special enrollment period that begins when employer coverage is terminated

The question that often comes up, is how much does coverage on the exchange run? The cost of an insurance policy purchased via an exchange can vary dramatically based on a number of factors, but somewhat ironically, an individual’s health is not one of them! Rather, under Federal law, the only five factors that insurance companies can use when establishing premiums are: Age, Location, Tobacco use, whether or not it is individual coverage or for family and the Plan category.

Health insurance purchased on the exchange for early retirees can be rather expensive. The average cost of a Silver Plan purchased via an exchange for a 64-year-old in 2020 is $1,058. But that’s just the average, and the actual price of insurance can vary substantially from location to location. For example, a Silver Plan will cost a 64-year-old living in Cheyenne Wyoming about $1,717 per month. That’s more than 50% higher than the national average! Meanwhile, a Silver Plan for the same 64-year-old living in St Paul, Minnesota would cost “just” $655 per month.9

Preparing for and funding your care as you age is one of the most important steps you can take in the wealth planning process, especially as you approach and live-in retirement. While most investors are aware and concerned about the escalating cost of care, few have done anything about it. It is feasible to plan for these costs. Whether that is leveraging an HSA while you are still working or managing your income needs if possible, to take advantage on the premium assistance tax credits for the years before Medicare begins.

It will take careful and proactive planning even when deciding things like the best Part D prescription drug plan you should get or the right Medigap supplemental policy all while considering your current health and medical needs.

Planning for annual health care expenses in retirement is complicated because of all of the different factors to consider. Planning for everything from coverage types to out-of-pocket expenses and possibly a Medigap policy to help, personal health risk factors, how to bridge coverage needs prior to Medicare and even the cost of Medicare itself, all need to come together to give you a projection for what you could spend every year for health care.

Planning For Medical Costs In Retirement

While there will be some years that may still be higher with unexpected out-of-pocket medical expenses, the reality is that health care costs in retirement aren’t a lump sum. It is an annual cost that you will want to factor into your retirement analysis just like you do with every other expense in your life. It will just take a little additional work to determine the right amount to project.

Our firm would be happy to help you put together a detailed analysis of your retirement and help you plan for health care costs in retirement. Use the link below to schedule time for us to connect.

1- PWC- Employee Financial Wellness Survey 2016

2- Kaiser Family Foundation, October 2018

3- EBRI, Utilization Patterns and Out-of-Pocket Expenses for Different Health Care Services Among American Retirees, February 2015. Figures represent average out-of-pocket spending annually

4- 2021 Retirement HC Costs Report – Healthview Services

5- Medicare.gov 2021

6- EBRI Issue No. 481, May 2019

7- RBC Wealth management- Taking Control of Healthcare In Retirement

8- Piplsay- Hollywood Celebs as Politicians 2021

9- Kff.org – Health Insurance Marketplace Calculator

‍