Not only does healthcare become more necessary as individuals grow older, it becomes more expensive too.
Aug. 9, 2017 Whitepaper

Managing Healthcare Costs in Retirement

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It’s no secret that as people age, their bodies tend to break down. Joints begin to ache, backs become stiff and sore, and overall it becomes more and more difficult to stay healthy. Not only does healthcare become more necessary as individuals grow older, it becomes more expensive too.

Additionally, the potential inflation rate on healthcare expenses is nearly triple that of the United States annual inflation rate. Health care expenses are expected to grow at an annual rate of 5.5 percent over the next decade while annual inflation is predicated at 1.9 percent, according to Bloomberg. With such potential high-cost increases, Social Security’s cost-of-living may not be able to keep up, especially considering all the uncertainty with the program’s funding. On top of all of these issues, modern medical technology is keeping people alive for longer than ever before, and life expectancies continue to increase over time.

Today, healthcare in the United States has also become a political topic. Many politicians have called for reform on programs such as the Affordable Care Act, also known as Obamacare. It currently appears that the GOP has abandoned their efforts due to lack of support. One change being called for is the removal of the Obamacare mandate. Other issues that were to be addressed by the proposed bill include reduced funding to Medicaid and cutting its spending, reducing ACA tax credits, and allowing insurance companies to charge seniors higher premiums. Those who would benefit from the proposed plan are the young and healthy, those without insurance, those with annual earnings in excess of $200,000, and small business owners. It does not look like the plan will pass, but even if it does, the Democrats would likely repeal the new plan if they were able to regain control of Congress in the future3.

Despite all these factors that continue to drive up expenses, most people still have no indication of what their healthcare costs may be while in retirement. For example, Forbes states that 30 percent of Americans believe home health care expenses are less than $417 each month. In reality, this kind of care may cost over $45,000 each year, nearly $4,000 per month.

In 2016, a 65-year-old couple would need roughly $270,000 in savings in order to have a 90 percent chance of covering their healthcare expenses in retirement1. Since women have higher life expectancies, they will typically need more money to cover healthcare costs. This dollar amount is expected to increase over the next few years. From 2015 to 2016, projected savings targets increased as much as 6 percent.

Combating costs prior to retirement

One way to keep healthcare costs lower as you age is to try to live a healthy lifestyle. A healthier lifestyle will often lead to fewer health issues down the road; therefore, lowering healthcare expenses.

Diet and exercise are usually the two biggest areas where individuals struggle when trying to live a healthier life, but they are not the only things to keep in mind. Getting proper sleep is another major factor in an individual’s health. Getting eight hours of sleep will not only allow you to feel fresh mentally in the morning, but it also gives your body the time it needs to recover and get ready for the next day. Stress is also a major health consideration that often does not get the attention it deserves. Staying relaxed and keeping blood pressure down can really pay dividends in the long run. Often individuals may face a great deal of stress in their careers, as their families grow, and many other areas of their lives. It is a great idea to find a way to relax and relieve stress. Many people choose to use exercise as a means of helping them lower their stress levels. However, everyone is different. You should look for an approach that works for you.

Another way to get the upper hand on these large expenses is to treat them as a certainty rather than a possibility. By saving for these costs early, it will be easier to cover ground when the expenses occur. Depending on the benefits an employer provides, you may have the option of participating in workplace savings plans to help fund retirement. IRA’s and 401(k) are two common options used by employees. These retirement savings vehicles have restrictions on taking money out too early, and often an employer will match employee contributions up to a certain percentage. These accounts are a great tool for saving for retirement, but most people would prefer to not spend everything they save in an IRA or 401(k) on healthcare. This is where a health savings account (HSA) can be a great idea.

An HSA requires the individual to have a high deductible health plan (HDHP) which has lower monthly premiums than a traditional insurance policy. Funding of an HSA is on a pre-tax basis, so using those untaxed funds to cover out-of-pocket medical expenses can work to effectively make healthcare more affordable. Another benefit of an HSA is that the unused funds roll over from year-to-year, and sometimes may even earn interest. Unlike with a flexible spending account, there is no threat of losing funds that are not spent, and an HSA can also be transferred from job to job. Most individuals who have HSA’s use them to cover current healthcare costs, but there are potential tax benefits in using them to save for the healthcare expenses incurred in retirement.

One benefit is the account balance grows tax free. Interest, capital gains, or dividends which are earned are not taxed, allowing for much more growth within the account. Another benefit is that contributions to an HSA are tax deductible. If an employer makes contributions for the employee, those contributions are not counted as part of the employee’s taxable income. The third tax benefit is that withdrawals for qualified medical expenses are not taxed. However, the withdrawal is subject to a 20 percent penalty and income taxes on the funds if it is not for a qualified medical expense. There are no age restrictions on withdrawals, although contributions are no longer allowed once an individual has reached age 65 and is eligible for Medicare.

If this account may be used to fund medical expenses in retirement, a good strategy is to maximize the contributions prior to age 65. In 2017, annual contribution limits for a HSA’s are $3,400 for self-only coverage and $6,750 for family. These limits include any contributions made by an employer. Anyone age 55 or older can make an additional $1,000 annual catch-up contribution. If you choose to use an HSA to fund retirement healthcare expenses, look at the HSA as an investment. This means that during working years, you should try to avoid taking money out of the HSA, choosing instead to pay cash out-of-pocket for medical bills.

Another consideration when looking to use an HSA to fund retirement expenses is the investment strategy of the funds. HSA’s have a more flexible investing structure, similar to an IRA. However, different HSA administrators have different investment approaches for the accounts. For example, some may only allow the money to be invested into a savings account. It is important to shop around and find an HSA with the right investment opportunities for your unique situation.

In order to get ahead of healthcare costs, you need to plan ahead and cover a wide variety of possibilities. Look at aspects such as how expenses change with increased life expectancies or by varying the extent of necessary care. It is also important to understand how pre-existing conditions (and not having them) impacts the cost of healthcare. Knowing how you utilize healthcare is another large factor to consider. For example, someone who visits the doctor often should factor this in to the healthcare they are planning on paying for. The difficult aspect of planning for healthcare expenses in retirement is the fact that there are many “unknowns”. Longevity, interest rates and returns on investments, changes to public policy and health status are just a few of the wide variety of factors to be considered. However, that uncertainty is also what makes planning even more crucial. It can be an excellent idea to sit down with an advisor and map out future healthcare costs one could face.

Options, considerations, and funding strategies within retirement

One of the most well-known and frequently-used funding options for healthcare costs during retirement is through Medicare. Medicare is broken up into parts which focus on different areas of healthcare. The program has requirements which an individual must meet in order to qualify, such as reaching age 65 or receiving Social Security Disability Insurance (SSDI) checks for 24 consecutive months.

Medicare part A covers services and supplies considered necessary to treat a condition and is sometimes referred to as hospital insurance. This includes hospital care, skilled nursing facility care and hospice, among others. Part A coverage often does not require a monthly premium, as most individuals pay in through a federal tax during their working years. If you have part A coverage, you are typically required to also have part B.

Medicare part B coverage is also known as medical insurance and covers costs like outpatient care, ambulance services and durable medical equipment. You pay a monthly premium, which, in 2017, the standard monthly premium is $134. The premiums are calculated individually using your modified adjusted gross income, and the highest earners (salary of more than $214k) may pay premiums each month of $428.60 per person. If an individual is receiving Social Security and has Medicare premiums to pay, those premiums will be deducted automatically from the Social Security monthly payment. Parts A and B are the most common Medicare segments and also come together to form Traditional Medicare.

Medicare Advantage, otherwise known as part C, incorporates Medicare’s private plans. Medicare-approved private insurance companies run the plans and pay a pre-determined amount each month for an enrollee’s care, regardless of what was needed.  To enroll, an individual must also be enrolled in parts A and B and continue paying the monthly premium for part B. Plan options can include a Health Maintenance Organization (HMO), Preferred Provider Organization (PPO), or a Medical Savings Account (MSA) among others. These plans can vary greatly in both benefits and costs, if interested, make sure to find the specific plan which best fits your needs.

Medicare part D covers prescription drugs. In most plans, drugs are separated into several tiers. These tiers are typically determined by cost, so if you are prescribed a drug on a higher tier than what your plan covers, an exception is needed for a lower copayment. Part D also has premiums determined by your means, similar to part B.

One thing to keep in mind with a part D plan is that some may encounter a coverage gap, also referred to as the “donut hole.” This gap begins after you spend more than a specified amount on drug coverage for the year, which in 2017 is $3,700.  Once an individual is in the coverage gap, you will pay 40 percent (at most) of the plan’s cost for brand-name drugs, which includes both the cost of the drug and the fees. The manufacturer will offer a 50 percent discount on the price of the drug, which also counts towards your out-of-pocket spending. If the individual is prescribed generic drugs, Medicare will pay 49 percent of the price during the coverage gap, leaving the individual with 51 percent of the costs. Only the amount you pay counts toward out-of-pocket spending with generic drugs. However, as a result of the health reform law, the coverage gap is slowly being phased out by 2020. Each year this amount will decrease until you typically pay no more than 25 percent for your drugs at anytime during the year after you’ve met your deductible. Once you have paid $4,950 out-of-pocket for covered drugs in 2017, you will be out of the coverage gap and reach catastrophic coverage. Catastrophic coverage will require either you pay 5 percent of the cost of each drug or a $3.30 copay for generic drugs and $8.25 for brand-name.

Enrolling in Medicare has some required steps that must be taken to avoid a penalty or period without coverage. The initial enrollment period begins three months prior to the month in which you turn 65. It ends three months after the month in which you turn 65, making it a seven-month enrollment period. There is also a general enrollment period each year from January 1 through March 31 if you meet certain qualifications. If you sign up during this time, your coverage will start on July 1.

For each full 12-month period an individual does not have coverage after reaching eligibility for Medicare Part B, your monthly premium for Part B may go up 10 percent. This penalty does not ever go away, so waiting three years after eligibility to buy coverage under Medicare B may increase premium costs by 30 percent going forward.

As mentioned earlier, Medicare plans with premiums determine the amounts of those premiums by evaluating the income level of the individual or couple paying in. The surcharge is set up as a percentage increase in premium costs based on the income range a retiree or couple falls in. The surcharge is not adjusted for inflation, so it can be very beneficial to plan out expenses and income in advance in order to avoid moving to a higher income bracket.

Medicare plans do not cover all healthcare costs, so you can purchase Medicare Supplement Insurance, or Medigap. To get a Medigap policy, an individual must already have Medicare A and B. A Medigap policy requires a monthly premium paid to the private insurance company the plan was purchased from. Medigap policies only cover one person, so a couple must buy two separate policies. Medigap costs vary by state, and it is important to note that Medigap policies also do not cover everything, so just because an individual buys a policy and has Medicare does not mean they are fully insured. Long-term care, dental care, routine foot care, hearing aids and eye examinations are all examples of services that are not covered under Medicare.

Many retirees use Social Security to fund healthcare in retirement. It’s important to remember that Social Security was originally designed as a supplement to income or what has previously been saved. Whereas Medicare is a specific healthcare plan that retirees can buy into, Social Security is basically an income stream.

Sometimes you can retain healthcare coverage through a former employer with a group health retiree insurance plan. This is not required of employers, so benefits and premiums can be changed, and sometimes coverage can even be cancelled. You should be aware of the type of coverage that is offered through the plan, whether a spouse is covered by the plan, and if the coverage will remain in place once the individual is eligible for Medicare. Medicare will pay first after an individual is retired, so many retiree plans offer similar coverage to a Medigap policy.

Long-term care costs may possibly be the most underestimated of healthcare issues for retirees. There are various degrees of long-term care. The most affordable option is adult day care, which provides a place for individuals to go during the day so that family members who are caring for them can work without worry. The median cost for adult day care is about $17,6802 per year.

Another option is assisted living, which involves staffing and programs to support individuals with daily living assistance in a home or apartment style setting. This type of care has a median cost of $43,5392. Homemaker services cost about $45,7602 per year, and that involves services such as laundry, meal preparation, grocery shopping, and vacuuming. In-home health care is another option for some families. This involves assistance with necessary daily functions such as bathing and dressing, and usually costs around $46,3002 each year. The most expensive long-term care option is residing in a nursing home. Depending on the selected privacy of the room, a nursing home can cost as much as $82,000 to $92,0002.

With how expensive all these options are, it is a good idea to have a plan in place in case one is needed. One option is to purchase a long-term care insurance. Policies can be individual or joint and are sometimes even offered through a former employer. Rates are locked in, so buying in good health at a younger age will help to keep costs down. Also, the benefit of the policy may grow over time to keep up with increasing costs.

When purchasing any type of insurance, there a few major considerations that should be included. The life expectancy and general health of the potential insured can greatly alter the cost of the policy. Knowing the costs of the event that is being insured against can allow an individual to determine if the policy is worth purchasing. Also look at the health of close family members when they were at the same age, as many traits can be genetically passed from parents. If insurance is already owned, consider how much and exactly what it covers. It could be wasteful to pay for additional and unnecessary coverage.

Many accounts a retiree will be taking money out of during retirement offer tax breaks if distributions are taken properly. Be aware of age restrictions or monetary limits on withdrawals before a penalty is assessed. It is also important to know what funding sources are considered income, as this can drastically alter tax rates along with decreasing benefits or increasing payments, such as the premium payments for Medicare B and D.

Finally, take advantage of any options that may present themselves for paying less for healthcare. If you reach age 65 and are still working, you can start using Medicare along with retaining your current coverage.

Retirement should be a time of relaxation and enjoyment. You should be able to travel, spend more time on a favorite hobby and enjoy the company of you family without worrying about the possibility of financial burdens. Planning for potential costs is a major first step. You can also create a health directive or give Power of Attorney in case you are no longer able to make decisions due to an illness or injury. When planning for retirement, have a conversation with your family about possible health-related issues. Overall, the best way to approach healthcare expenses in retirement is to be prepared and well-informed. Keeping up-to-date on changes in programs can allow you to both take advantage of helpful changes and avoid harmful ones. While we can’t predict the challenges we may face in retirement, the more that is planned for the more one is ready for. Meet with an advisor today and discuss healthcare needs and options in your retirement future.

Sources:

1EBRI, Savings Medicare Beneficiaries Need for Health Expenses, Jan. 31, 2017

2Genworth, Compare Long Term Care Costs Across the United States

3The Balance, Donald Trump on Health Care, July 27, 2017

This commentary is limited to the dissemination of general information pertaining to Mariner Wealth Advisor’s investment advisory services and healthcare costs. The information contained herein is not intended to be personal legal, retirement, medical, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be relied upon as such. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. There is no guarantee that any claims made will come to pass. The opinions and forecasts are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon.

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