How to Pay for Healthcare in Retirement

My Comments: Last Friday I introduced the idea of a Health Savings Account or an HSA. For the rest of this week, I’m going to add to your understanding of this potentially useful financial device and it’s favorable tax consequences.

The words that follow here may not apply if you are about to sign up for Medicare. They apply to those of you under age 65 who also have what is known as a high-deductible health plan (HDHP).

Also, if you are employed and have an employer sponsored health insurance policy, and you don’t have a high deductible option, you too may not qualify for a HSA. But there are millions of Americans for whom an HSA makes sense.

For example, you’re thinking of taking early retirement, and are several years away from Medicare eligibility. You don’t want to be uninsured, so you sign up for an individual health insurance policy. If that describes you, one option is to find one with a high deductible and couple it with an HSA.

A significant existential risk for all of us as we age is our health. Bad health, coupled with not enough money, significantly increases the odds of having the light go out before we’re ready. Taxes tend to reduce the amount of money we have available, and an HSA has several tax benefits.

We all want to be able to pay for health care efficiently and keep the light on. However, that’s sometimes a tricky balancing act. On one hand we have to pay for groceries and a place to live, all the while knowing that if the light does goes out, paying for groceries and a place to live is irrelevant.

My effort these days is teaching people how to make smarter decisions about their money, long before it becomes an either/or situation. Let’s start this week with these words from Kris Maksimovich.

by Kris Maksimovich, AIF®, CRPC® October 15, 2018

Many people are concerned about how the cost of healthcare in retirement will affect their ability to keep the money they have. According to a Nationwide survey, an astounding 73% of respondents say one of their top concerns in retirement is paying for healthcare. This is not surprising since healthcare is likely to be one of the largest expenses in retirement. However, only a fourth claim to have discussed their concerns with an advisor, mainly because they feel it’s too personal to discuss with others.

Though most people remain tight-lipped about their healthcare needs in retirement, 78% expect their advisor to provide planning advice that includes healthcare costs. This is why it’s so important for you to discuss your retirement healthcare needs with your financial advisor. Your advisor can help you work through many different scenarios for covering costs, including Medicare and HSA plans.

The Many Parts of Medicare

According to the Nationwide survey, 90% of older adults plan to use Medicare for their healthcare needs when they retire, but most admit they don’t know what it covers.

Medicare coverage is designated using a variety of letters. The important ones are Part A, which covers major medical and inpatient care, Part B, which covers doctor’s visits and outpatient care, and Part D, which covers prescription drugs. Though Medicare Part A coverage is free as long as you qualify for it, the bulk of Medicare is not free. The more money you make, the higher your Medicare Part B and D premiums will be, but there are options to offset these costs.

Selecting a Plan

There are several things to consider when selecting the right Medicare plan:

  • The original Medicare plan, consisting of parts A and B, does not cover deductibles, co-pays, coinsurance, most dental care, most prescriptions, routine eye and hearing exams, fitness programs, or services outside the United States.
  • Distributions from health savings accounts, Roth IRAs, cash value life insurance policies and income from reverse mortgages aren’t included in the formula used to determine your Part B premiums.
  • If you go with Medigap supplemental insurance to cover deductibles and co-payments, shop around as the prices vary wildly.
  • You may want to purchase an all-in-one Medicare Advantage plan. Though you may have a limited provider network, you may save on premiums over purchasing Medigap and Part D plans.
  • You’ll want to enroll when you are first eligible to avoid late-enrollment penalties, even if you are still working at age 65. Plus, there are deadlines and eligibility dates for making changes.

Health Savings Accounts

Health savings accounts (HSAs) are similar to individual retirement accounts. Both employers and individuals can contribute pre-tax dollars for eligible individuals, and HSAs do not have to be spent in the current calendar year, so the balance can be carried over indefinitely.

According to the Nationwide survey, 65% of workers are not using their HSA as an investment vehicle. Money in an HSA can be invested in stocks, bonds, mutual funds, certificates of deposit and other similar investments. What’s more, HSAs offer a triple tax benefit:

  1. Funds can be deposited pre-tax
  2. Growth is tax-free
  3. Distributions are tax-free as long as they are used for qualifying medical expenses

To take advantage of an HSA, you must meet several conditions. Here are the eligibility requirements for 2019:

  • You must be covered under a high-deductible health insurance plan.
  • Self-only coverage must have an annual deductible of at least $1,350 and annual out-of-pocket expenses not to exceed $6,750.
  • Family coverage must have an annual deductible of at least $2,700 and annual out-of-pocket expenses not to exceed $13,500.
  • A plan may not pay benefits other than preventive care until the insured or insured’s family has incurred covered medical expenses in excess of the annual deductible each year.
  • You may not be covered by any other health insurance plan that is not a high-deductible health insurance plan, including a spouse’s or parent’s plan or Medicare.
  • The insured may not be claimed as a dependent on another person’s tax return.

2019 Contribution Limits

Contributions for 2019 may be made up to $3,500 for individual coverage and $7,000 for family coverage. If you are age 55 or older, you can contribute an additional $1,000 each year. Additionally, contributions can be made for the previous year until April 15, similar to an IRA. You may also fund an HSA through a one-time, tax-free rollover from a traditional or Roth IRA. Some of the qualified medical expenses include:

  • Medical plan deductibles
  • Long-term care insurance premiums
  • Diagnostic services
  • Some nursing services and drugs that require a prescription, though some over-the-counter drugs can be reimbursed if a prescription is obtained
  • COBRA healthcare continuing coverage or insurance coverage while receiving unemployment benefits
  • Premiums for Medicare Part B, Part C and Part D

There are many intricate options like coordination with Medicare, excess contributions and transfers through death or divorce, so it is wise to seek the advice of a financial advisor to help you determine the best options for your personal situation.

Other Financial Options

There are other options to help you cover the cost of healthcare in retirement. For instance, long-term care insurance and other policies can help cover the cost of in-home care. These policies come in many different sizes and with many options. Also, you’ll likely have access to Social Security benefits and IRA distributions as part of your overall income. Your advisor can help you create personalized healthcare cost estimates, recommend funding sources, project your savings needed to cover those costs and work through the best tax-reduction options for your situation.

With so many options available for paying healthcare needs in retirement, it’s important to share your healthcare needs with your advisor, even if it’s a bit uncomfortable. When your advisor has a full understanding of your unique situation, they can help you create a plan to specifically meet your needs and help you keep more of your money in retirement.