In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers Chapter 10 of the 2nd edition of the book titled, “Health Care.”
Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.
Chapter 10 – Podcast Script
Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that provides a step by step plan on what to do as you transition into retirement.
This podcast covers the material in Chapter 10, on managing health care costs in retirement.
If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help.
When it comes to health care costs in retirement, the media scares us with big numbers. One common statistic you see is the lump sum cost for health care for a couple age 65 and older.
For example, the Fidelity Retiree Health Care Cost Estimate is frequently quoted by the media. It says an average retired couple, age 65 in 2018, will need approximately $280,000 saved (after taxes) to cover health care expenses in retirement. This sounds scary, but it is almost the same price tag that is quoted as the average cost to raise a child. Most parents don’t have $280,000 sitting in an account when they have a baby, yet they still manage. Health care costs are similar.
Let’s look at these expenses annually instead of as a lump sum. $280,000 over 25 years is $11,200 per year, or $5,600 each. When you think of it this way, it becomes a manageable expense that you can plan for.
However, this expense does not occur evenly, like a car payment. Instead, the expenses vary depending on what phase you are in. The more you understand what to expect, and how the expenses vary, the better of you’ll be.
There are four key areas of planning for health care costs that I’ll cover in this podcast.
First, Medicare, which begins at age 65 for most people.
Second, the gap years, which occur if you retire prior to age 65 and don’t have any employer provided coverage to bridge the gap until age 65.
Third, I’ll talk about one of my favorite savings vehicles, the Health Savings Account.
And the last thing I’ll cover will be long term care costs.
Let’s start with Medicare. If you’ve worked in the U.S. long enough to qualify (which is 10 years or 40 calendar quarters of covered work), then you become eligible for Medicare at age 65. Medicare has four parts; Parts A, B, C and D.
Medicare Part A begins at age 65 and is free. Part A is the foundation of the Medicare program and is often referred to as hospital insurance.
Medicare Part B is next, and it is not free. It covers additional services, some medical supplies and some preventative services. You pay a monthly premium for Part B. The amount is announced annually.
In 2019, the basic Medicare Part B premium is $135 per month. However, this premium is means tested -so if you have a higher income, you may pay more. Those with the highest incomes pay $460 a month instead of the $135. I’ll cover this means testing in more detail in just a few minutes.
Medicare Part D refers to prescription drug coverage that you can add to your basic Medicare Part A and B benefits. As with Medicare Part B, high-income folks pay more. In 2019, the base premium is $33 a month, and the highest income households pay $77 a month.
If you add up what is covered in Parts A, B and D, you’ll find there are gaps in coverage. On average, Medicare covers about 50% of your total health care costs. Most people purchase what is called a Medigap or Medicare Supplement plan, which wraps around Original Medicare and helps cover these gaps.
A few years ago, a second option became available. This is what is sometimes called Medicare Part C or a Medicare Advantage Plan. It is private insurance that provides coverage in a single plan that includes Parts A and B, and may also include Part D. Some Medicare Advantage plans also include extra services like vision, dental, and hearing.
Currently, you must choose between either a Medicare Advantage plan or Original Medicare augmented with a Medicare Supplement policy.
You will start receiving information about Medicare six months before your 65th birthday. Most people enroll as soon as they are eligible. But what do you do if you are still working at age 65 and have insurance through your employer?
Then, it depends on the size of your employer. In general, if your employer has less than 20 employees, Medicare will become your primary insurance, even if you are still working. You will typically enroll in Parts A & B.
If you employer has over 20 employees, Medicare is often the secondary insurance. Usually you enroll in Part A, but may be able to delay Part B. And possibly delay Part D depending on the drug coverage provided.
It’s important go get this right, because if you were supposed to enroll in Medicare, but don’t do it in time, a penalty can apply. The penalty for not enrolling in Part A on time is temporary, but the penalty for not enrolling in Part B can mean you pay a higher Part B premium for the rest of your life.
We encourage people to talk to their current health insurance provider and consult with an independent agent to discuss options as they near age 65.
For those of you who with higher incomes, I am going to spend a few more minutes on the Medicare Part B and D means testing. This premium adjustment for higher income tax filers is called IRMAA or the Income Related Monthly Adjustment Amount. Medicare estimates that IRMAA results in increased premiums for about 5% of the population.
Means testing begins when your modified adjusted gross income exceeds $85,000 for single filers, or $170,000 for married filers. These limits are fixed and do not adjust up with inflation. The final premium amount is determined based on your income; the more income, the higher the premium.
Those with the highest incomes, over $500k for singles or $750k for marrieds, pay $460 a month instead of the $135 base amount.
These IRMAA premiums are determined by looking at your tax return two years prior. If you’re age 65 in 2019, they’ll be looking at your 2017 tax return. But what if your income was much higher two years ago than it is now?
We come across these situations on a regular basis. I’ll share two of them. The first is a married retired doctor and the second a single veterinarian. In both cases, they are over age 65, and their income is much lower now than it was two years ago.
We suggested each person file for a reconsideration of IRMAA. There are seven reasons you can request a lower IRMAA premium and retirement, or working less hours, is one of those seven reasons.
For our retired married doctor this may save them over $5,000 this year. For the veterinary, perhaps $1,000 - $2,000 in savings.
How do you go about paying your Part B premiums?
If you are not yet receiving Social Security, then you receive a quarterly invoice for your Part B & D premiums. Once you begin Social Security, Part B & D premiums are deducted from your monthly Social Security check.
I’ve now covered the basics on Medicare. Overall, when you go right from employer provided coverage to Medicare, the transition is not too difficult. But what about those of you who plan to retire before age 65?
You need to plan for the gap years.
The gap years occur when you retire before age 65 and have no employer sponsored health coverage. Coverage during this time period can be expensive.
Take the case of Doug and Beth as an example.
Doug worked for a construction firm and had planned on working until age 65. He was forced into retirement a few years early, at 62, when the economy took a dive. His wife, Beth, was about eight years younger, and had no plans to retire in the near future.
With a little rearranging, and through Doug’s use of extended unemployment benefits, their plan absorbed the change. To my surprise, a year later they came in to see if they might find a way for Beth to retire as soon as possible.
Beth explained that her take-home pay was only about $1,400 a month and that if she started her pension at age 55, the pension would be $1,300 per month. “What is the point of continuing to work?” she asked.
On the surface, her logic made sense, until I explained to them the cost of health insurance. Beth was paying only $54 a month for health coverage; her employer was paying the rest of the premium. Once retired, as neither she nor Doug was yet Medicare age, equivalent health insurance for the two of them would run $1,400 a month. When we factored in benefits, Beth’s job was paying her twice what she had thought.
If your employer provides health insurance, it is likely subsidizing the cost, and you may have no idea how expensive it can be if you leave the workforce.
When you leave your employer, you have COBRA coverage available for up to 18 months, so if you retire at 63 and a half, that will get you to Medicare-age. Premiums in the $700 - $1,000 per person per month range are common on COBRA, so plan for this in your budget.
If you are younger, and you’ll need to cover health care without COBRA, you’ll need to buy insurance from the marketplace exchange. Premiums depend on where you are located and what type of plan you choose. There are four plan types; Bronze, Silver, Gold and Platinum.
If you are healthy, the Bronze plan may be your best bet. It offers the lowest monthly premium, but the insurance company pays only 60% of your health care costs. If a health issue shows up, this plan can get expensive quickly. If you have known health issues you can opt for a Platinum plan. You’ll pay a larger monthly premium, but the insurance company then covers 90% of your costs.
In Arizona, where the insurance options for marketplace plans have been limited, I have frequently seen premiums in the $1,000 to $1,400 per month per person range. That means a couple could be spending $30,000 a year on health insurance. To me, this sounds astronomically expensive.
There is a health care tax credit that is designed to help offset these premiums. Eligibility depends on your Modified Adjusted Gross Income (or MAGI). In 2018 singles with MAGI of less than about $48,000, or marrieds with just under $65,000 of MAGI qualified. Although you may instantly think you wouldn’t qualify for this credit, don’t be quick to jump to conclusions.
Health care tax credits are not just for lower net worth households – in many cases qualifying for a tax credit is about planning. Take the case of Jason and Mary. They have over $2 million in financial assets, and a paid off home. They retired in their early 60’s and have a comfortable amount of cash flow coming in, which for them is about $7,000 a month. That is $84,000 a year - but not all of it counts as Modified Adjusted Gross Income. Cash flow does not always equal what shows up on a tax return. With careful planning, we’ve kept them eligible for the health care tax credit for the last three years, saving them almost $20,000 a year in premiums.
We were able keep their Adjusted Gross Income low by making the portfolio tax-efficient and being careful about how much in capital gains we realized each year. In addition, each year, we were able to decide if needed funds should come from a Roth IRA or brokerage accounts to minimize what would show up on their tax return. In these gap years, this kind of planning can really pay off.
We’ve talked about a few cases where covering the gap years was expensive. On the flip side, I have one client who worked for a Fortune 500 company and retired in his late 50s. His employer provided retiree coverage for the gap years, and he pays less than $5,000 a year for he and his wife. Then at 65, they’ll transition on to Medicare. Unfortunately, these plans on rare. If you have one, count yourself lucky.
The important thing about planning for the gap years is making sure you have estimated the cost, and have a plan in place to cover it.
Next, let’s talk about one of my favorite savings vehicles, the Health Savings Account or HSA.
An HSA can be a great tool to use to help you prepare for the gap years.
I love HSAs because when used correctly, you get a deduction when you put the money in, and the funds are tax-free when they come out. This is unheard of! From a tax standpoint, it is one of the best deals out there.
To establish an HSA, you must have a high deductible plan that is labeled as eligible to use with an HSA.
The basic premise is that you lower your insurance premiums by choosing a high deductible plan. Since you are paying a lower premium you contribute your monthly savings on a tax-deductible basis to the health savings account.
You can use the funds in the HSA any time for eligible medical expenses on a tax-free basis. An eligible or qualified medical expense includes things like:
Co-pays and expenses that apply to your deductible
And even over-the-counter medications if prescribed by your doctor
Certain types of medical equipment can also count
Accessing your HSA funds for medical expenses is easy. I have an HSA account that comes with a debit card. When I incur medical expenses, I could use that debit card to pay for these expenses directly from my HSA account with tax-free dollars. Instead, I choose to pay for expenses out-of-pocket so my HSA can accumulate for use in my retirement years.
This works well because the funds grow tax free - by letting it grow you get more tax-free growth to use later.
And, as you probably know, health care expense can occur suddenly and in lumpy amounts. Having a larger HSA balance to draw out of tax free for these lumpy expenses makes a lot of sense.
And, HSA funds can be used to pay premiums under COBRA, premiums for a tax-qualified long-term care insurance policy, and to pay your Medicare Part B & D premiums in retirement.
The only downside to an HSA is that you can’t put more in them. As with an IRA, there is a maximum allowable contribution. In 2019, the maximum contribution a single tax filer can make is $3,500 (plus an additional $1,000 catch-up if you’re age 55 or older). And for a family plan the maximum contribution is $7,000 – or up to $9,000 if you and your spouse are both over age 55.
One key difference between HSAs and IRAs is the early-withdrawal penalty. With an HSA, a 20% penalty tax applies for early withdrawals if they are not used for medical reasons. For HSAs, an early withdrawal is defined as one that occurs before age 65. For IRAs it is a 10% penalty tax for early withdrawals, and an early withdrawal is one that occurs before age 59½.
In conclusion, I call HSAs one of the two superhero retirement accounts. The other is the Roth IRA, which is beyond the scope of what I can cover today.
The last topic for today is long term care.
Let me tell you a story about John and Kathy that helps illustrate how long-term care needs work. John and Cathy were in their 70s when they were referred to me by their accountant. They had been married over 50 years, and they brought a smile to my face every time they came in, often still holding hands.
As they reached their early 80s, I will never forget them sitting in my conference room one day, sharing with me their heartfelt thoughts on living and on dying. John was fighting a round of skin cancer, and Cathy had Parkinson’s.
John said, “We’ve had a wonderful life. Our children are grown and doing well. Now, we’re ready to go. Trips to the doctor and medications. Who wants all that? We’re ready to go.”
John had a stroke a year later and passed away quickly.
I went to visit Cathy numerous times and eventually met all their children. She was weak and frail and I honestly didn’t think she’d make it more than a year past John’s passing. But slowly a sparkle returned to her eye, and her strength returned. We would talk over a glass of wine, and I would gain the most marvelous insights from this amazing 84-year-old woman.
Although Cathy’s strength grew and she was healthy and alert, she needed assistance around the home. Her long-term care policy covered in-home care, so she had a helper who came each day from about 10 to 2 to prepare meals, clean, do, laundry, run errands, help Cathy with bathing and so on. Although we think of long-term care needs as being confined to a nursing home, Cathy’s situation is quite common, and in-home care is an important feature offered by most long-term care insurance policies today.
Contrast Cathy’s situation with that of my grandpa. In 2012, I flew to Des Moines, Iowa, for a family reunion put together in honor of my grandpa’s 90th birthday. Grandpa’s short-term memory loss had started to result in things like the stove being left on and forgotten medications. This was my first time to visit him in the care facility the family had located for him.
It was a nice place with spacious, living room–like gathering areas, and Grandpa expressed that he was happy there. There were security codes with a double door system to get in and out, and although I realize they are needed for his protection, it was still odd, almost as if we start in a playpen and one day we end up back in one again.
Grandpa knew who I was, but other parts of his memory were jumbled up a bit. Other than memory loss, though, he was quite healthy. He spent many years in this care facility before passing away. Grandma had passed away many years prior, so all of Grandpa’s income and assets were able to be used to support his care. If Grandpa still had a spouse at home, though, the financial strain of the situation would have been substantial.
You do not know what the future may bring. Will you, like John, go quickly of a stroke, never needing any form of long-term care? Or maybe, like Cathy, you’ll need in-home care? Or will you, like my grandpa, need many years in a full-care facility? And how will such care needs be financed?
If you have no insurance, you spend your own funds and assets and eventually if you run out of assets you go on Medicaid. Each state has its own limits on how much income or assets you or your spouse are allowed to retain before becoming eligible for Medicaid. It’s not much that you’re allowed to keep.
Or you can shift some of the financial risk by buying a long-term care insurance policy. From my own observations in working with retirees, it seems most people who can afford long-term care insurance find that having it brings them great peace of mind.
In our planning process, we use the median length of stay of five years in a full care facility and test to see if you have enough assets to cover this expense. For example, at $200 a day, in today’s dollars, a five year stay in a care facility runs bout $365,000. If your plan could sustain this expense, you may not need insurance coverage.
However, the insurance offers other benefits. Those with insurance will often opt for better quality care. It can also make the decision easier on a spouse if they know there are insurance funds to help cover the cost.
We recommend people get quotes, evaluate the risk and make an informed choice on how they want to handle the potential risk of a long-term care expense.
We’ve now covered Medicare, including Parts A, B, C and D, and you’ve learned that higher income families may pay more for their Part B & D premiums. You’ve also learned the Medicare will not cover all your expenses and so you’ll need a Supplement policy or Medicare Advantage plan.
If you’re planning on retiring early, you know you’ll need to budget for the gap years. You’ve also learned about HSA accounts and how they can be used to save for the gap years. And, you have some insight into the various ways long term care expenses can occur, and how you can pay for them.
Thank you for taking the time to listen today.
Chapter 10 of Control Your Retirement Destiny provides additional examples, and links to many online references that are useful as you are planning for health care costs. Visit amazon.com to get a copy in either electronic or hard copy format.
You can also visit sensiblemoney.com, to see how a staff of experienced retirement planners can help.