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Will you have enough money in retirement to cover not only your routine living expenses, but also your healthcare costs? There’s good reason for concern: Such costs, already high, have risen faster than general inflation for more than two decades, and are projected to keep doing so well into the future. Furthermore, employers are under pressure to restructure their retiree health-insurance plans due to rapidly escalating costs and the huge wave of “baby boom” workers now nearing retirement. Often the result is higher premiums and/or less-generous coverage for retired employees.
A major investment firm recently estimated that the average couple retiring today at age 65 without employer-provided medical benefits will need to have put aside $215,000 in savings to provide for their healthcare needs (this is an estimate; your own needs may vary substantially). That figure doesn’t include the potential cost of long-term care such as prolonged stays in a nursing home. And if you retire before age 65, your medical expenses could run even higher, since government-supported coverage (mostly Medicare) typically isn’t available until you reach that age.
But like many of life’s challenges, this one can be met with thoughtful planning. Here are some key factors to consider.
- Evaluate your future health prospects. Start by considering your lifestyle. Do you avoid smoking and excessive drinking? Control your weight? Exercise regularly? Take your relatives’ health history into account as well. For example, if high blood pressure or heart disease run in your family, hospital deductibles and prescription-drug coverage deserve special scrutiny in choosing a post-retirement insurance policy.
- Review government-based insurance programs. These are major sources of support for most retirees in meeting their medical expenses, but also subject to modification by federal and state governments. Some analysts believe that the combination of fewer workers and a swelling retiree population will create strong fiscal pressure to lower benefits in coming decades. Key programs include:
- Traditional Medicare—Most people qualify automatically for Medicare hospital insurance (Part A) when they reach age 65. This coverage is free if you or your spouse paid Medicare taxes while you were working. Part B, which covers a range of other medical services, charges a premium which varies by household income. Optional coverage for prescription drugs (Part D) also carries a premium, which varies according to the plan you choose.
- Medigap/Medicare Advantage—Many medical expenses, such as dental care, routine physical exams, and hearing aids, aren’t covered by the parts of Medicare described above. That is why retirees often purchase “Medigap” supplemental insurance (formerly Part C), meant to cover what traditional Medicare doesn’t, or Medicare Advantage plans, which often feature broader coverage and more coordinated care than the original Medicare plan, but also a narrower choice of providers and/or higher premiums. Offered by private insurers, premiums for these supplements and alternatives to traditional Medicare vary depending on where you live and the level of coverage you choose.
- Medicaid is a federal/state program that covers medical costs for low-income individuals and families.
- Review your employer’s retiree benefits, which may include contributions to health-insurance premiums; ways to help employees save for health costs; providing access to medical care at a group discount; giving new retirees a lump sum for future healthcare expenses; or some combination of these. However, an employer’s retirement benefits are subject to change at any time, and many workers today may not stay with a single employer long enough to qualify for them.
- Maximize your contributions to tax-advantaged savings vehicles such as your company’s retirement savings plan. These are designed for paying living expenses in retirement, including medical costs.
- Consider setting up a Health Savings Account (HSA). There are two main advantages to an HSA: Contributions to such an account are tax-deductible, and funds taken from it are tax-free if used for health-related expenses. However, HSAs aren’t for everyone. For example, to open an HSA you must be covered by a qualified high-deductible health-insurance policy, which may not be offered by your employer or appropriate for your needs. There are other requirements for opening an HSA as well. Go to http://www.ustreas.gov/offices/public-affairs/hsa/faq_basics.shtml for more information.
- Weigh the pros and cons of long-term care insurance. Neither Medicare, Medigap policies, nor standard health insurance policies fully cover long-term care. That leaves most people with two options when faced with such expenses: pay out-of-pocket, or rely on private specialized insurance. The decision whether to purchase a long-term care policy is complex and depends on you and your family’s particular circumstances. For most people, however, the overarching consideration is the trade-off between the cumulative cost of such coverage, and the peace of mind it can provide.
Whether you expect to retire this year or in 30 years, the time to begin planning for health-care costs in retirement is now. The sooner you put strategies into place for meeting these expenses, the better off you will be. |
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