Have you ever heard that old Cinderella song, “Don’t Know What You Got Till it’s Gone”? Did you know that song is actually about a retiree who loses employer healthcare coverage, and has to pay for it on their own? Well, maybe not, but it could be. Ask most retirees what they are most worried about in retirement and the answer will typically be paying for healthcare. A recent report by Fidelity Investments claims that a 65 year old retired couple should expect to spend $275,000 for healthcare expenses! It’s not a good sign when just the healthcare costs in retirement exceed the median retirement savings for a 65 year old. Healthcare options are changing daily, but this chapter will discuss some common healthcare options you will have in retirement and focus on what healthcare options are right for you.
Retiring prior to 65
At age 65, a retiree can begin taking Medicare and the healthcare decision actually becomes much easier. We will talk about how Medicare works in the next part of this section, but the harder planning happens if you decide to retire prior to age 65. There are typically three options that a retiree has if you retire prior to Medicare age. These three options ranked from least to most expensive are:
- Retiree healthcare from your employer
- Private healthcare
- COBRA insurance
Retiree Healthcare from your Employer
Retiree healthcare provided from a former employer is by far the best option a person has to bridge the gap between retirement and Medicare. Like a pension this is also one of those benefits that many employers are cutting in order to save some money. Make sure you know before you retire from a company if your employer provides retiree healthcare and what the details are of the plan. Yes, retiree healthcare is your best option if available, but it also is probably not as robust as your current healthcare plan. Very often, I will see that your deductible and/or monthly premium will be much higher than the plan when you are working. For example, some GM and Ford employees are eligible for retiree healthcare, but many are surprised how much larger the premiums and deductibles are in retirement.
If retiree healthcare isn’t available, now you need to start scrambling for options. The two ways a person can find healthcare coverage in retirement are either on the healthcare exchange or through COBRA insurance. No section in this book is more fluid than the private healthcare exchange. Pretty good chance that by the time I finish writing this Obamacare may be gone and replaced by something else. Unfortunately, this isn’t a good thing for retirees. The main benefit of Obamacare for retirees is that insurers are required to accept you no matter your past health history. Although some people will complain about the cost, having good health insurance that ignores pre-existing conditions is a huge benefit. Also, depending on your retirement income you may be eligible for credits that helps lower your monthly premium.
Now for the bad with Obamacare, it’s expensive. If you don’t qualify for an income credit, you should expect to pay at least $1,000 per month for health insurance for a family of two. Yes, it really makes you appreciate that healthcare benefit that your company provided! You can see the different plans and costs at www.healthcare.gov In 2018, for a family of two, you will qualify for reduced health insurance premiums if your income is lower than roughly $65,000. This may be lower than your income while working but your retirement income will be reduced and may be less than the number to receive tax credits.
The most expensive option for most retirees is COBRA insurance. COBRA is a continuation of your current insurance without the employer chipping in to help cover the cost. As soon as you see what the true cost of your health insurance was, you may have a better feeling about that job of yours. Depending on how good your health insurance was while working, there is a good chance that your COBRA coverage in retirement will cost you well over $1,000 per month for a family of 2. Also, COBRA insurance only lasts for up to 18 months after you retire. If you have more than 18 months between retirement and age 65, COBRA may not even be a long-term option for you.
So COBRA is very expensive and doesn’t last too long, why would I even consider it? COBRAs biggest benefit is that you continue the same medical insurance that you had while working. If you have high medical expenses, it may be worth it to pay a higher monthly premium knowing that most out-of-pocket costs will be covered. Obamacare may have a lower premium, but will typically come with higher out-of-pocket costs, which may not work if you have some higher known medical costs when you retire. Also, if Obamacare is repealed, you may have trouble getting health insurance if you have pre-existing conditions. COBRA does not care about pre-existing conditions. Although COBRA may have the highest monthly payment of your health insurance options, it may be your best option. If you have high healthcare costs (i.e. a known surgery, expensive prescription drugs, or battling an illness) and need a short bridge to age 65, you may find that COBRA insurance is the best bet for you. Also, as we discuss later you can use an HSA to pay for COBRA premiums, but not Obamacare premiums.
Remember those really great birthdays as a kid? When you turned 16 and got to take your parents car out for your first drive. Turning 21 and heading to the bar for the first time. Well trust me, 65 blows all of those birthdays away. Age 65 is when you qualify for Medicare and if you are paying $1,000 per month or more for either Obamacare or COBRA coverage, get ready for a pay raise. Yet, Medicare is also confusing and a mistake can be easily made if you don’t know your options. This section explains how to make the most out of Medicare.
First, let’s talk about the basics. If you qualify for Social Security, you will also qualify for Medicare. If you are retired and drawing Social Security, you will automatically be enrolled in Medicare as well when you turn 65. If you are retired but delaying Social Security, you will need to sign up for Medicare. Medicare Part A and Part B are the building blocks for Medicare. Medicare Part A is hospital coverage, and there is no monthly premium. Part B covers medical coverage, and the monthly premium is around $134 in 2018 (although it could be higher if your income exceeds $170,000 for a married couple). Your monthly Part B premium can increase if your income is higher in retirement. There are also Medicare Advantage and Medicare Supplement (Medigap) plans, as well as Part D coverage which covers prescription drugs. Confused yet? Let me make this as easy as possible. There are really only two main choices that you have with your Medicare decision; original Medicare with a Medigap policy or a Medicare advantage plan (HMO or PPO plan). We’ll discuss which plan might be best for you.
Original Medicare with Medigap
With original Medicare, you purchase your plan right through Medicare. As mentioned above, you would have Medicare Part A and B for $134 per month. From there, you would need to choose a Part D, drug plan, from a local provider. This may run you from $10 to $50 per month, depending on your drug needs. If you want, you can stop right there. This would be the cheapest option but as you can imagine, the monthly premium doesn’t cover a lot. Yes, you will be covered if you need to visit a doctor or if you need to stay in the hospital but the deductibles can be high and out of pocket maximums can eat away at your retirement savings quickly. If you choose Original Medicare, many people will purchase a Medicare Supplement plan (a.k.a. Medigap) as well. Purchasing a Medigap plan lowers the deductible and out-of-pocket maximums that a person would have under Original Medicare. For example, a person can purchase Original Medicare and a Medigap F (yes, more letters) Plan and she could see basically any doctor and have no extra costs besides the monthly premium. This is probably the most robust health insurance plan a person can have in retirement, but the Medigap F plan will run you at least $150-$300 per month on top of the $134 you are already paying for Original Medicare, and you will still need to purchase a drug plan. Also, Medigap policies don’t have any dental or vision coverage.
The other option that you have in retirement is to purchase a Medicare Advantage Plan. The good news about a Medicare Advantage Plan, is that it is like most health insurance plans that we have while we are working. The bad news is that now you have potentially hundreds of plans to choose from, and the choice can be daunting. If you purchase a Medicare Advantage Plan, you will typically choose between an HMO or PPO plan that is available in your area. If you loved the insurance that you had while working, Medicare Advantage should allow you to get very similar or the same coverage. Also, a Medicare Advantage plan will typically include eye and dental insurance which is not included in Original Medicare or Medigap. You will still pay the Part B monthly premium ($134 in 2018) and then you will pay an additional amount on top of that depending on the coverage you choose. Obviously, the more robust coverage you choose, the more the monthly premium.
The best part of the Medicare Advantage plan is the flexibility that it gives you, but this can also be a problem. For example, a simple search for Medicare Advantage Plans in my area (a Detroit suburb) results in 34 different Medicare Advantage Plans. Each has a different drug plan, yearly deductible, out-of-pocket max, in-network vs. out of network coverage, dental and vision coverage. The monthly premiums can run anywhere from $0 (an HMO plan with a high deductible and only in-plan doctors) to $315 (a PPO plan with no deductible, any choice of doctor, and comprehensive dental and vision coverage). www.Medicare.gov is an excellent resource that will allow you to see all of your Medicare Advantage options as well as the Medigap policy prices in your area. It even allows you to enter your prescription drugs and doctors to see which plans match your needs.
Making the Decision
One of the most confusing decisions that you make in retirement is the Medicare decision. Here are the benefits of both plans so that you can compare which one is better for you.
Original Medicare + a Medigap Policy
- Can see almost any doctor
- Can go to any hospital/urgent care facility that accepts Medicare
- Medigap Policy F covers all of your deductibles and copays
- Medigap policies can have an expensive monthly premium
- Doesn’t cover dental or vision
- Need to buy a separate Part D policy for prescription drugs
Medicare Advantage Plans
- Typically lower monthly premiums compared to Medigap policies
- Similar or the same insurance as when you were working
- Can cover vision, dental, and prescription drugs
- May be limited to in-plan doctors
- Out of pocket costs may be higher depending on the plan that you use
- Many choices can be confusing
There is no right answer for which Medicare program is best for you. Here are a few examples of programs that may be right for your situation.
Low Cost Option
An HMO Medicare Advantage Plan is slightly more expensive than original Medicare, but should offer more healthcare benefits than original Medicare. An HMO Medicare Advantage Plan will cover a good amount of healthcare costs but typically you will need to use an in-plan doctor and go through a primary physician before seeing any specialist. An HMO Medicare Advantage Plan may also help cover dental, vision, and prescription drugs which Original Medicare doesn’t cover.
A Good Middle Ground
A PPO Medicare Advantage Plan will cover everything that the HMO plan covers but usually the coverage is more robust and you can be covered out-of-network. The main benefit of the PPO plan over an HMO plan is that you don’t need to see a primary care physician each time you need medical care. PPO plans will carry a higher monthly premium than an HMO plan, but out-of-pocket costs should be lower.
Getting original Medicare with a Medigap F policy is the Cadillac of Medicare policies. You can visit basically any doctor and you will have no out-of-pocket expenses outside of the monthly premium. Unfortunately, the monthly premium is high and if you don’t have high healthcare costs, you are spending a lot each month for a benefit that you aren’t using. Also, you will need to buy a separate prescription drug (Part D) policy if you go this route.
Health Savings Account (HSA)
One of the most effective ways to pay for healthcare in retirement is through an HSA. HSAs are the most tax friendly savings account available. Contributions go in before tax and distributions, as long as used for healthcare expenses, are tax free. You can only make HSA contributions if you have an HSA eligible healthcare plan which is a high deductible plan. You may complain about the high deductible, but the HSA savings part is an incredible advantage and you should take full advantage of it. If you have access to an HSA while you are working, try to max out the contributions each year, even if this means having to lower 401(k) contributions. Trust me, it is almost impossible to put too much in an HSA. Healthcare costs are going to run you hundreds of thousands of dollars in retirement, you need all of the savings that you can muster for this area. At age 65 you can withdraw money from your HSA for other reasons besides medical expenses, but you will pay taxes on the distribution just not the penalty that you would pay prior to age 65.
Here are 5 tips for maximizing your HSA.
It is also very important that you understand the type of medical expenses that are considered qualified and can be withdrawn tax-free from the HSA. You can only use the money for what the IRS considers qualified medical expenses. This covers most medical procedures, but doesn’t cover monthly healthcare premiums. If you have a significant HSA and retire prior to Medicare, you can’t use the HSA to pay for typical medical premiums but you can use it for COBRA medical premiums. This may affect the type of insurance that you purchase when you retire. Also, you can use an HSA for the monthly Medicare Advantage premium but not a Medigap policy. Therefore if you have a significant HSA value when you reach 65, you may want to consider a Medicare Advantage plan over a Medigap policy.
Trying to choose the best Medicare policy may be confusing, but at least you have the option. Retiring prior to age 65 and your healthcare options may be greatly reduced and also very expensive. If you don’t have an employer provided retiree healthcare policy in retirement, you need to strongly understand what your costs are going to be if you retire before age 65. If you are fortunate to have this employer provided benefit, this could make retiring early much easier. Overall, your healthcare costs in retirement will be significant and you need to be prepared for these costs in your budget. Budgeting for healthcare may be the hardest cost to anticipate in retirement. If you are planning to retire prior to age 65, start looking at what Obamacare options that you have in your area and what the costs range. Also, look at what COBRA coverage will run you and remember if you retire prior to 18 months before your 65th birthday, you will also need to supplement your health insurance through Obamacare as COBRA runs out after 18 months. You can also go to www.medicare.gov to research medicare options that you have in your area. Healthcare in retirement can be expensive and confusing so understand your options so that you can have a solid plan and budget for healthcare before you retire.