A Couple's Guide to Healthcare Costs in Retirement
Medical expense planning is an important part of overall planning for retirement. While many elements of health insurance are based on the individual, it is important to evaluate and plan for these expenses as a couple because what happens to one person inevitably affects the couple as a whole.
HealthView Services, one of the largest healthcare cost data providers, estimated it would cost a healthy 65-year-old couple $404,253 to pay healthcare premiums – plus deductibles, copays (and hearing, vision and dental out-of-pocket costs) – for their retirement in its 2017 Retirement Health Care Costs Data Report. Even if your family is doing better than average in savings, planning how you’ll handle health expenses is one of the most crucial jobs for any couple.
Here are four things you need to consider when mapping out a happy and healthy retirement for you and your spouse.
1. Time Retirement to Healthcare Costs
If your current health insurance is a family plan through your employer, your retirement will have an impact on the whole family. Weigh all options and choose the ones that work best for everyone.
Consider Delaying Retirement
There are several reasons to delay retirement, including taking care of “big ticket” medical procedures covered by your current insurance. Working longer so that you can save more to cover your future healthcare costs is another reason. Finally, you might delay retirement simply because your current plan offers more than Medicare or Medicare Advantage plans.
Switch to Your Working Spouse’s Plan
Once you retire, switching to your still-working spouse’s employer healthcare plan can let you delay applying for Medicare. Otherwise, you must apply during the seven-month period beginning three months before the month you turn 65 and ending three months after the end of the month you turn 65.
Check carefully with Medicare, though – if your spouse works for a small company (fewer than 20 employees), you may still be required to apply for Medicare or pay a penalty.
Examine Non-Medicare Coverage
If both you and your spouse plan to retire at the same time and one is too young for Medicare, then that spouse will need individual coverage. Additionally, if you have children under the age of 26 who are still eligible to be covered under your insurance, be aware that Medicare does not provide family coverage.
One option is to consider buying COBRA under a former employer’s plan for up to three years. This can be quite expensive since you have to pay the full premium. Another option is coverage for your spouse or kids under the Affordable Care Act provided through the health insurance exchange in your state.
2. Budget for Insurance Each Spouse Will Need
Many people forget that their former employer picked up the tab for a big chunk of previous health insurance premiums (80 percent for singles and 68 percent for families, according to U.S. Bureau of Labor Statistics in 2017). In retirement, you will likely be paying the full amount. Once you’re on Medicare, each family member will need individual insurance, as Medicare does not offer family plans.
- Retiree Health Insurance: If you or your spouse will have access to retiree health insurance through your employer, determine how much it costs, what it covers and how it coordinates with Medicare before signing up. Most retiree plans are not employer subsidized.
- Medicare Part A: Most people qualify for Medicare Part A (hospitalization) at no cost. If you do have to pay a premium, include it in your budget.
- Medicare Part B: To date, the majority of people pay a monthly premium for Part B (Medical) of $134 a month. If your combined income is more than $170,000, you will pay more. For details, see the Medicare.gov website.
- Medicare Part C: Part C (Medicare Advantage) replaces Parts A, B, and often D. Medicare Advantage (MA) is private insurance and prices vary based on coverage offered, which can include vision, hearing, and dental. With Part C, you will pay a premium in addition to your Part B premium.
- Medigap: This supplements Part A and Part B so you must also have A and B to have Medigap. Premiums for Medigap vary depending on coverage but each plan “type” (A-N) offers some version of that coverage. Medigap policies do not offer prescription drug Part D coverage. If you buy Medigap during your six-month Medigap open enrollment period, you can buy any level of coverage you want without a health exam. It may be worth buying the best plan that each of you can afford.
- Medicare Part D: Prescription drug coverage under Medicare comes from Part D (or from a MA plan that includes drug coverage). Premiums for Part D vary by provider as with Part C and Medigap. If combined income is above $170,000, you will pay a surcharge.
- Long-Term Care Insurance: Medicare long-term care coverage is limited and does not pay for long-term custodial care in a nursing home. According to the U.S. Department of Health and Human Services, the average daily cost of long-term custodial care is $225 (based on 2016 data). Also, long-term care insurance costs about $2,207 per year on average and provides a daily benefit payment of $160 for 4.8 years. Figures vary considerably by region and the age you were when you purchased your insurance.
3. Sources of Retirement Savings
Retirement saving is individual – just like retirement health insurance. You and your spouse should have individual retirement accounts in addition to any property or investments you own jointly. Withdrawals from these accounts can ensure that you have enough to pay health-insurance premiums, co-pays and other healthcare expenses.
You may want to consider these savings options:
- 401(k) Plans: If both you and your spouse work, you should take advantage of available workplace 401(k) plans and max out your respective plans each year. If company matching is available, consider making it as high as possible.
- IRAs (Roth or Traditional): If you meet the income requirements, look into opening a Roth IRA for each of you. Qualified distributions will be tax-free for both contributions and earnings with no required minimum distributions (RMDs). When combined income is too high to invest in a Roth IRA, you can still invest in a traditional IRA. These let your potential earnings grow tax-deferred until retirement, though depending on income limits, you may not be able to deduct your contributions if one or both of you has a 401(k) or similar plan at work.
- Spousal IRA: A working spouse can take out a spousal IRA in a non-working spouse’s name. This effectively doubles the amount your family can invest in IRAs. Don’t forget to name each other as beneficiaries on all retirement accounts.
- Saver’s Credit: If you are a married couple whose joint income is less than $61,500, you might qualify for a saver’s credit of between 10 and 50 percent of your IRA or 401(k) contributions up to $4,000. The amount you can take depends on your adjusted gross income and is subtracted directly from what you owe the IRS.
4. How to Pay for Medical Expenses
The final step is determining how to pay for everything, including an allowance for inflation and unexpected medical expenses. A financial advisor can help you plan for these expenses and recommend the right products, investments and strategies.
These may include:
- Investments: These typically include mutual funds and stocks. Although there are no guarantees associated with these investments, potential growth can help offset the effects of inflation, and they have the potential to create capital growth for late-in-life healthcare costs.
- Health Savings Account: If you are in a high-deductible health plan at work, be sure to open an HSA and fund it while still working to provide for healthcare funding in retirement. If you’re lucky, your employer may contribute as well.
- Annuities: An annuity can provide a stream of income to pay for medical expenses. Some annuities can be structured to generate tax-free income if used to pay for long-term care insurance.
- Life Insurance: Policies that can be used for medical expenses include combination policies with long-term care coverage and accelerated death benefit insurance. You can also tap into the cash value of a permanent life insurance policy to help pay for care or expense, though doing so reduces the cash value and death benefit.
- Lower Income: Work with a financial advisor to keep a careful watch on income sources that can push you into extra health spending. For example, a joint income of $170,000 triggers the highest Medicare Part B and Part D premiums. You may also be able to slip back under the threshold by donating your required minimum distributions (RMDs) from traditional IRA accounts or tapping cash-value life insurance policies that don’t count toward the threshold. Keep track of all deductible health-care expenses to offset income that does count.
- Convert to a Roth IRA: If you face large RMDs from Traditional IRA accounts, consider converting some or all of those funds to a Roth IRA before you turn 70.
(For more see: Planning for Healthcare.)
The Bottom Line
Timing, budgeting, individualized retirement accounts and proper planning will put you and your spouse in a position to enjoy retirement without worrying about that next big medical expense.
As always, consult with a trusted financial advisor to avoid snags and to ensure your plan makes sense for both of you.
(For more see: Retirement Planning Basics.)
[Note: Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Confer with your qualified legal, tax and accounting advisors as appropriate.]
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