Estimating retiree health care costs requires taking several factors into account. Lump sum estimates may be misleading and not useful for budgeting purposes, while premiums typically come out of income while out-of-pocket expenses could come out of savings, like an HSA.
Separating out-of-pocket expenses from supplemental insurance policies is also vitally important.
As most Americans approach age 65, they eagerly anticipate becoming eligible to enroll in Medicare – the U.S. federal health insurance program designed for people 65 or over as well as some younger people with disabilities – which provides hospitalization coverage, medical insurance and prescription drug benefits at relatively affordable costs.
Beneficiaries of traditional Medicare are frequently faced with additional health-related expenses that go beyond what’s covered under their basic Parts A and B plans, leading them to purchase private supplementary health insurance to cover these costs; others enroll in Medicare Advantage plans that aim to minimize out-of-pocket spending; still others depend on Medigap policies – privately sold insurance policies designed specifically to fill any coverage gaps created by Part A or Part B deductibles and copayments – in order to fill coverage gaps created by the Medicare Parts A or B plans.
Medicare remains an attractive health care coverage solution for seniors seeking health coverage, and currently serves over 60 million Americans enrolled. Financing of this program comes through payroll taxes paid by both employees and employers (1.45% each) plus surcharges levied against higher income earners; combined with contributions from beneficiaries, these funds provide enough money to pay for its current operation until 2028 when its sustainability will inevitably wane. Actuaries project that this arrangement will remain solvent through 2028 before eventually becoming insolvent shortly thereafter.
Add Medicare Supplement Insurance, commonly referred to as Medigap, to your coverage can reduce many of the out-of-pocket expenses associated with Medicare Parts A and B – such as deductibles, copayments and coinsurance payments – as well as long-term care expenses.
Medicare beneficiaries currently can select among 10 Medigap plans, yet their details and options can be complex. Each state imposes rules regarding which benefits should be included in each plan and limits or bans on how much a plan may charge for certain services; so it’s essential for people planning for retirement to understand Medicare and Medigap so they can make educated decisions when purchasing additional coverage.
The Kaiser Family Foundation has introduced a tool to assist consumers in comparing and assessing Medigap policies. It uses an illness-episode approach to estimate out-of-pocket expenses that seniors will likely incur upon experiencing 13 common illnesses, and how their costs vary across various Medigap policies.
People whose incomes fall within 135% of the federal poverty level may qualify for a subsidy to cover their Medicare premium or purchase a private Medigap plan that guarantees issue (in most states) without regard to preexisting medical conditions. Employees enrolled in group health plans through their employer also have the right to purchase Medigap policies within 63 days after losing coverage through that employer plan.
Health Savings Accounts (HSAs)
An HSA is a tax-advantaged account designed to help cover qualifying medical expenses. HSAs are associated with high-deductible health plans (HDHPs), which tend to feature higher deductibles than traditional preferred provider organizations and health maintenance organizations.
HSA contributions and investment earnings are tax-free, while withdrawals for medical expenses are also exempt from income taxation. This represents an advantage over traditional retirement accounts such as 401(k)s and individual retirement accounts that only allow withdrawals at some point for non-health related expenses and can subject you to income taxes at that point in life.
An HSA should be utilized most effectively by contributing the maximum contribution amount each year, investing these funds and saving receipts of eligible expenses you incur. Financial advisors advise estimating how much medical costs you plan to incur within a given year and contributing that sum – leaving any excess growing within your HSA as savings for future expenses.
An effective use for your HSA may be as a “bridge” between Medicare and your employer-sponsored retiree healthcare plan or Medigap policy by withdrawing funds for eligible expenses that will later be reimbursed via reimbursement from these plans or policies. Be mindful when withdrawing non-medical expenses prior to age 65 as penalties can be severe; additionally, to use your HSA post age 65 you must enroll in Medicare first.
Long-term care (LTC) refers to assistance that may become necessary as you age if you suffer from severe health conditions or chronic illness, whether at home, in a community setting or residential facility. Many who need long-term support continue needing it over a prolonged period, often for the rest of their lives.
Traditionally, families were responsible for caring for elderly relatives in their family unit; today however, most aging adults require professional services ranging from home health aides to nursing homes if they require long-term care services. Therefore, long-term care planning should be a top priority when approaching retirement age.
As you evaluate your options for long-term care planning, contact a financial advisor specializing in LTC planning. They can assess your potential needs for long-term care services and advise if an insurance policy would meet them.
LTC policies tend to be more affordable when purchased while younger and healthier, so for example a 62-year-old male might expect to pay around $300 monthly for a traditional policy with $165,000 level benefits, including cost-of-living adjustments which protect against inflation; other policies – called partnership policies – enable you to protect a portion of assets that might otherwise be lost if qualifying for Medicaid was possible.
As soon as you become older when purchasing an LTC policy, the higher its premium will become and less coverage you will receive. While early LTC policies advertised themselves as lifetime coverage with benefits that compounded each year, such high costs led insurers into financial distress; as a result they’ve since altered their policies accordingly.