Preparing for Healthcare Expenses and Unknowns in Retirement

Healthcare continues to rapidly change and evolve. The memories of low co-pays and deductibles are becoming fleeting for many. Getting sick or injured can be expensive, even with insurance coverage. Skyrocketing premiums and co-pays are squeezing personal budgets and companies’ bottom-line profitability. Obamacare, officially known as the Patient Protection and Affordable Care Act (PPACA), continues to help millions of previously uninsured people obtain healthcare, but not without reverberating challenges for many who already had acceptable care at an affordable price.

HDHP and HSA Options

Thankfully, there is a way for individuals to obtain a healthcare policy and save tax free; both at the same time. High-deductible health plans (HDHP) provide individuals with a form of “catastrophic” coverage if and when needed. Meanwhile, they can self-pay for infrequent healthcare needs. At the same time, participating in a health savings account (HSA) allows for a yearly tax deductible contribution that grows tax free. “For 2016, if you have self-only HDHP coverage, you can contribute up to $3,350. If you have family HDHP coverage you can contribute up to $6,750.” Plus, if you are age 55 or older, you are permitted an additional $1,000 contribution. And if your employer contributes to your HSA, the contribution is tax free to you.

A recent article by Greg Geisler, PhD, “Could a Health Savings Account Be Better than an Employer-Matched 401(k),” in the Journal of Financial Planning promotes HSAs as the first choice in retirement saving. Dr. Geisler notes that contributions made are exempt from federal and state taxes (other than in AL, CA, and NJ) and propagate tax free. Distributions from the account are tax free if used for qualified healthcare expenses. This triple benefit has the potential of trumping traditional financial planning advice and may prove to be more beneficial to the retiree.

When withdrawals are used for qualified healthcare expenses they are considered tax free. There is no requirement that HSA funds be spent in any year. If used for a non-covered healthcare expense, proceeds are subject to income tax and an additional 20% penalty. An exception to the 20% penalty rule is allowed if an individual is disabled, age 65 or older, or dies. Any account value upon death may be transferred to a spouse for their tax-free HSA use. If left to assigned beneficiaries or the decedent’s estate, the HSA is terminated and proceeds become taxable.

Expenses in Retirement

According to the Employee Benefit Research Institute, “Older singles and older couples tend to face sharply different out-of-pocket expenses for non-recurring healthcare services such as home healthcare, nursing home stays, overnight hospital stays, and outpatient surgery—possibly because they do not have a spouse to help as caregivers.”

A 2015 report by HealthView Insights determined, “The average lifetime retirement healthcare premium costs for a 65-year-old healthy couple retiring this year and covered by Medicare Parts B, D, and a supplemental insurance policy will be $266,589.”

Furthermore, the Department of Health & Human Services reported, “As the United States population ages, a higher proportion of individuals will likely need and use long-term care services and supports (LTSS). Most Americans who receive formal LTSS pay out-of-pocket. For those with longer spells, they may pay out-of-pocket until they qualify for Medicaid.”

An individual living alone can expect more than half of the anticipated couples’ cost not only because they won’t have a spouse to assist to their needs later in retirement, but also due to the necessity of supporting and saving on only one income. The eventuality for long-term care is evident no matter whether the person is single or married. “Seventy percent of people turning age 65 can expect to use some form of long-term care during their lives. There are a number of factors that affect the chances that you will need care: age, gender, disability, health status, and living arrangements.”

As explained earlier, contributing pre-retirement to a HSA in association with a HDHP is an excellent way to save tax-free for healthcare-related costs. Unfortunately, this option ceases once enrolled in Medicare Part A. Individuals who adequately plan for retirement can potentially afford expenses not covered by Medicare, i.e., 20% co-pays or any uncovered but qualified healthcare costs, i.e., elective procedures.

Reduce Post-Retirement Expenses

However, the following are some suggestions which may help mitigate post-retirement healthcare expenses.

Staying healthy and active has been shown to help prevent or slow down certain chronic conditions. Periodic healthcare checks with your providers may catch something early on and allow for quick treatment and resolution.

Medicare Parts B and D premiums and deductibles are based on an individual’s modified adjusted gross income (MAGI) and will fall within one of three price points. The Income Related Monthly Adjustment Amounts (IRMAA) determination is what Medicare uses to determine any necessary premium increases and is done two years in advance of being billed. You can file an appeal if certain events take place that might lower a determined IRMAA, such as income reduction or the death or divorce of a spouse. The key is to lower your MAGI, thereby remaining below the triggering threshold and avoiding a higher Medicare premium and deductible.

Consider a Medicare Advantage Plan (Part C) vs. traditional Medicare. The switch may help control healthcare costs for some, but freedom of choice for direct access to providers may be limited without a referral. If participating in Part D, shop around for the best options and costs, and most importantly make sure whatever plan you select covers your drug needs.

If you are considering undergoing a non-covered procedure there is nothing wrong with negotiating the best price. These costs can be added to your yearly paid healthcare total. If your unreimbursed medical expenses exceed 7.5% of your adjusted income, you may qualify for a tax deduction.

Required Minimum Distributions (RMD) from tax-deferred retirement accounts are mandatory at age 70½ (with some exceptions) and this income is included in your MAGI. RMD is calculated by taking the total value of the account divided by your life expectancy. The earlier you access money, the lower the yearly amount received. Instead of waiting to access it when mandated, why not consider accessing it earlier thereby reducing the amount you receive each year? This may help lower your IRMAA.

A reverse mortgage is also an option for obtaining tax-free income from your home. You are still responsible to pay for home insurance and related property taxes. The downside is if you are planning on leaving your home to your heirs, there may be little if any value left for them to receive. However, the income you receive is not included in your IRMAA determination.

Long-term care insurance (LTCI) costs have been steadily increasing, but for those who can afford this coverage it may allow for quality terminal or nursing home care. Medicare does not pay for long-term care, except for up to 100 days of skilled nursing care and only after being admitted to a hospital for a minimum of three days. LTCI vendors now have hybrid opportunities allowing life insurance or cash value, nursing home care, and other options. LTCI may also be viewed as “wealth insurance,” as its use can limit your need to spend down personal assets, thereby leaving more within your estate for beneficiaries.

Determining whether participating in a HDHP and HSA is worthwhile for you and your family is a personal decision which should be thoroughly vetted with your Certified Financial Planner (CFP). Unfortunately, not knowing what the future will bring can be stressful. However, not planning for your retirement and anticipated post-retirement longevity may be worse. It’s not for everyone, but if you’re eligible, participating in a HDHP and HSA in addition to thorough and pro-active pre-retirement planning decisions may make the difference between whether you have a fulfilling and enjoyable retirement or not. It would be a shame not to have the wherewithal to financially sustain your quality of life and anticipated standard of living after years of dedicated and hard work.