Financial Advisor in Raleigh NC: Healthcare in Retirement
You may think that you don't need to worry about health care costs after you turn 65 and are eligible for Medicare. But you still have to pay some premiums and out-of-pocket expenses, and the numbers can add up over time.
The following steps can help you prepare for these expenses in retirement and minimize your health care costs:
Understand the costs and make strategic moves to fill in the gaps.
Build up tax-free savings in a health savings account.
Make the most of Medicare open enrollment each year.
Contest the Medicare high-income surcharge when you retire.
Take advantage of other ways to manage your health care costs.
Have a plan for long-term care expenses.
Understand the Costs and Make Strategic Moves to Fill in the Gaps
Those massive numbers are less intimidating when you break them down into monthly costs and prepare for these expenses in advance.
Medicare premiums account for 40% of the expenses. Even though Medicare Part A (which covers hospitalization) is free for most people, Part B (which covers physician services and outpatient care) costs about $150 per month – or more for high earners. Medicare doesn't cover prescription drugs, but you can buy Part D prescription-drug coverage to help with those expenses. You may still have some out-of-pocket costs for prescription drugs even with Part D. Most people buy a Medicare supplement policy (Medigap) to cover these deductibles, copayments and other costs, such as foreign travel.
Another option: Instead of getting Medigap and a Part D policy, you could get medical and drug coverage from private insurer through a Medicare Advantage plan. The premiums are usually lower than they are for Medigap and Part D – the average is about $36 per month, and some plans charge $0 premiums.
Build Up Tax-Free Savings in a Health Savings Account
You can't contribute to a health savings account after you enroll in Medicare, but you can use money you've built up in the account tax-free for even more expenses after you turn 65. In addition to out-of-pocket health care costs, you can also use HSA money tax-free to pay premiums for Medicare Part B, Part D and Medicare Advantage plans (but not for Medigap).
And you can withdraw money tax-free from the HSA to pay for other eligible medical expenses that aren't covered by Medicare, such as dental and vision expenses, hearing aids and over-the-counter medications.
Make the Most of Medicare Open Enrollment Each Year
You have from Oct. 15 to Dec. 7 to choose a Part D or Medicare Advantage plan for the next calendar year. Even though many people keep their coverage on autopilot, it's important to check out your options every year. New plans enter and leave the market, or they may boost premiums and change the copayments for your medications.
Medicare Advantage plans can also change costs, coverage, and provider networks – the doctors and hospitals you use may not be included in the plan the next year. And if your health needs have changed or you've been prescribed new medications, it's particularly important to compare your options because a different plan may be better for you now.
Contest the Medicare High-Income Surcharge When You Retire
Most people paid roughly $150 per month for Medicare Part B in 2020, but high earners paid more. If you're single and your adjusted gross income plus tax-exempt interest income is more than $87,000, or more than $174,000 and you're married filing jointly, then you may have to pay from $200 to $500 each month. The higher your income, the higher the premiums.
This high-income surcharge is based on your last tax return on file – so your 2021 premiums will be based on your 2019 income. If your income has dropped since then because of certain life-changing events – including job loss or retirement, divorce, marriage or the death of your spouse – you may be able to get the surcharge reduced or eliminated based on your more-recent income.
To request the change, wait until you get the notice of your Medicare Income-Related Monthly Adjustment Amount, or IRMAA, then file Form SSA-44 with the date of the life-changing event and a copy of your more-recent tax return (or an estimate of your annual income). You also need to provide evidence of the life-changing event, such as a letter from your employer stating that you retired.
Take Advantage of Other Ways to Manage Your Health Care Costs
Save on prescription drugs by asking your doctor if you can switch to a generic or a therapeutic alternative that covers the same need but costs less under your plan. Also, most Part D plans have preferred pharmacies, where you'll pay much lower copayments than at other pharmacies.
It also helps to use tools such as GoodRx.com that provide coupons and discount programs if you pay cash.
Have a Plan for Long-Term Care Expenses
The median cost of a private room in a nursing home was more than $102,000 in 2019, and the cost of an assisted-living facility or 44 hours per week of home care was about $50,000, according to the Genworth Cost of Care study. Some people don't end up needing any long-term care at all, but others need care for several years – especially if they have a long-lasting condition like Alzheimer's disease.
Medicare rarely covers any of these expenses, and Medicaid only kicks in after you spend almost all your money (and limits where you can receive care). Consider the potential cost of long-term care in your retirement plans.
You may want to buy long-term-care insurance to help cover some of these costs. Long-term care insurance has become more expensive over the past several years, so you may want to cover part of the cost of care from your savings and income and get insurance to fill in the gap. Most people who buy long-term care insurance are in their 50s or 60s.
Another option is a hybrid policy that provides long-term-care coverage or pays a death benefit to your heirs if you don't end up needing care. These policies have become more popular over the past few years because either you or your heirs will receive some benefits. But they tend to have higher upfront costs – you usually pay a lump sum or pay premiums over a fixed time period (such as 10 years).
Bottom Line
As you plan for health care expenses throughout your retirement—however long it may be—understand how paying for future health care expenses fits into your overall retirement income planning efforts, because health care utilization tends to increase as we age. You should always consult with a financial advisor or financial planner.
Sources:
https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
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