Addressing Healthcare Costs Before Retirement
Those approaching retirement may dream about bountiful leisure days with no work deadlines. However, when planning for retirement, it is critical to think forward about the potential cost of healthcare. Healthcare costs can be staggering in retirement and careful consideration is key to successful retirement planning.
During working years, many employees are provided with a healthcare plan through work. Not all plans are a perfect fit, but healthcare plans can provide a sense of security for employees who are in general good health.
Therefore when Medicare kicks in at age 65, many think of this as the magic age to retire as one could then rely on this coverage and forgo employer healthcare coverage. However, as a person's health naturally declines with age, if one has not planned for increased medical costs, healthcare can put a severe bind on a secure financial retirement plan.
What Medicare Covers
Various medical expenses are covered by different parts of Medicare.
Part A – Hospital Insurance
Part B – Physician/Medical Insurance
Part C – Medicare Advantage (Used in conjunction with Medicare. Not provided by Medicare, but instead provided by private insurance companies).
Part D – Prescription Drugs
Equally important to what is covered, is what’s not covered. The common needs of seniors are not necessarily coved by Medicare. Therefore it is essential to know in advance what is not covered. Below is an abbreviated list. A comprehensive list can be found on the Medicare website.
Medicare does not cover long-term care. Part A is only limited to hospital insurance.
Prescriptions glasses
Dentures
Hearing aids
Long Term Care is NOT Provided
Health insurance is designed to bring someone who is ailing back to good health. With this concept in mind, Medicare does not provide long-term or extended care services.
Unless a Long Term Care insurance plan has been planned for and purchased in advance, typically seniors rely on self-funding or care by family members. Long Term Care (LTC) insurance is purchased through an insurance carrier specializing in LTC products.
Policies can include provisions based on traditional long-term care insurance and hybrid policies that couple LTC insurance with an annuity rider. Insurance plans can be complex. Commissioned products can be expensive. Learn more by seeking a knowledgeable agent trusted by a fee-only financial advisor.
State-run Medicaid programs are another solution for long-term care. However, individuals applying must be financially destitute to qualify. Don’t plan on gifting your estate to another family member to make it appear that you should qualify for Medicaid. Rigid look-back provisions are strictly enforced.
Cost of Medicare Coverage
“Each year the Medicare Part B premium, deductible, and coinsurance rates are determined according to the Social Security Act. The standard monthly premium for Medicare Part B enrollees will be $164.90 for 2023” (Fact sheet 2023 Medicare Parts A & B premiums and deductibles 2023 Medicare Part D income-related monthly adjustment amounts).
Furthermore, care recipients pay a Part B annual deductible of $226 in 2023”(Fact sheet 2023 Medicare Parts A & B premiums and deductibles 2023 Medicare Part D income-related monthly adjustment amounts).
“Medicare health and drug plan costs and covered benefits can change from year to year, so people with Medicare should look at their coverage choices annually and decide on the options that best meet their health needs (Fact sheet 2023 Medicare Parts A & B premiums and deductibles 2023 Medicare part D income-related monthly adjustment amounts).
IRMAA Concerns
When approaching Medicare age 65, the impact of IRMAA (Income Related Monthly Adjustment Amount) should be considered and potentially addressed.
The Social Security Administration determines if you owe IRMAA based on your tax returns 2 years prior. The SSA may increase Medicare Part B and D premium payments.
As previously mentioned in 2023, the Medicare Part B standard monthly premium is $164.90. If your 2021 tax returns indicate to SSA that your income exceeds the MFJ $194,000 or $97,000 for single allowed, you will pay between $230.80 and $560.50 for Medicare Part B instead of the standard $164.90!
However, since the Medicare-eligible age of 65 is when many individuals plan to retire, household income usually is reduced due to forfeiture of wages. At this point, retirees should consider contesting any IRMAA rulings. Instead of waiting until 2025 for IRMAA adjustments to be made based on your reduced income level in 2023, by filing form SSA-44, you can essentially pre-alert SSA that your income has been reduced.
Other Resources to Pay For Medical Expenses
Medicare is not the only solution for covering the cost of medical expenses in retirement.
Cobra
For those who retire before Medicare eligible age 65, Cobra coverage may be an available option. Certain employer and employee criteria must be met to be Cobra eligible. For those who qualify, a Cobra election allows the retired employee to temporarily retain coverage in their employer health plan after they sever service. “Qualified individuals may be required to pay the entire premium for coverage up to 102% of the cost to the plan” (Continuation of Health Coverage (COBRA)). Check with your employer's benefits department before you retire.
HSA
Health Savings Account (HSA) contributions lower one's taxable income, grow tax-deferred and come out tax-free for eligible medical expenses. Additionally, if you qualified to sock away savings in a Health Savings Account (HSA), withdrawals for eligible medical expenses can be accessed tax-free with no penalties. Once the account owner attains the age of 65, funds can be accessed for any withdrawal needs, not just health-related.
FSA
Someone planning to retire may want to take advantage of contributing to an employer's FSA account. A Flex Spending Arrangement (FSA) is often referred to as a use it or lose it account. “Generally, contributed amounts that aren’t spent by the end of the plan year are forfeited” (Publication 969 (2022), health savings accounts, and other tax-favored health plans). Like an HSA, FSA balances used for qualified medical expenses can be withdrawn tax-free. The maximum amount you can receive tax-free is the total amount you elected to contribute to the health FSA for the year. However, “The maximum amount you can receive tax-free is the total amount you elected to contribute to the health FSA for the year”(Publication 969 (2022).
Veteran Administration Benefits
Resources can be found at both VA facilities and in-network providers. “A member of our Concierge for Care (C4C) team will call you soon after your separation from military service” (About VA health benefits). Learn more about VA health benefits at va.gov.
Conclusion
Comprehensive financial planning should occur to ensure all relevant financial matters are thought out and accounted for before retirement. Medicare provides hospital, physician, and limited drug coverage. However, what many seniors eventually end up needing is long-term care and this is not covered by Medicare. Other arrangements for financing LTC need to be considered. Traditional Medicare premiums can be negatively impacted by IRMAA an income-based lookback assessment by the Social Security Administration. Challenging an IRMAA assessment may help to reduce Medicare premiums incurred in the first couple of years after retirement. A qualified financial advisor will help you determine what to expect for medical expenses in retirement and how to pay for those medical needs when you no longer receive a paycheck.
References
About VA health benefits. Veterans Affairs. (n.d.). https://www.va.gov/health-care/about-va-health-benefits/
Continuation of Health Coverage (COBRA). DOL. (n.d.). https://www.dol.gov/general/topic/health-plans/cobra
Fact sheet 2023 Medicare Parts A & B premiums and deductibles 2023 Medicare Part D income-related monthly adjustment amounts. CMS. (n.d.). https://www.cms.gov/newsroom/fact-sheets/2023-medicare-parts-b-premiums-and-deductibles-2023-medicare-part-d-income-related-monthly
Publication 969 (2022), health savings accounts, and other tax-favored health plans. Internal Revenue Service. (n.d.). https://www.irs.gov/publications/p969#en_US_2022_publink1000204176
What’s not covered by part A & part B? Medicare. (n.d.). https://www.medicare.gov/what-medicare-covers/whats-not-covered-by-part-a-part-b
