Healthcare Costs in Retirement
Here at Your Retirement Advisor, questions we receive from our clients often concern the cost of healthcare in retirement. At YRA, we utilize several strategies that pre-retirees and retirees can implement to help cover the costs, no matter the amount.
Let’s take a look at Medicare and Medicaid first. Medicare certainly can help, but in their 2018 study the Kaiser Family Foundation found that average out-of-pocket health care spending by Medicare beneficiaries was 41% of average per capita Social Security income in 2013 [1]. In addition to this, the study concluded that this out-of-pocket spending increased steeply with age, more than doubling from 34 percent for beneficiaries ages 65 to 74 to 74% among beneficiaries ages 85 and over, on average.
A shortcoming of Medicare is that it covers short-term services for conditions that are expected to improve, leaving patients that require long-term care to pay largely out-of-pocket. Without add-on supplemental coverages, retirees will have to pay for dental care, vision, copays and assorted out-of-pocket expenses.
The estimates for retirement health care costs factor in the cost of buying insurance coverage, which assumes that a couple purchases Medicare parts B, D and a supplemental insurance policy or Medicare Advantage, known as Part C. All this insurance isn’t cheap, but is important to have (note: Part A of Medicare has no premium for people who worked, as well as their spouses).
Medicaid is a government program designed to help those in poverty and won’t help a high percentage of baby boomers that are in the the mass affluent group, the group of people who’s nest egg could be decimated by improper planning.
Medicaid is a program of last resort for people with limited assets:
- Meaning you may have to spend down your assets to qualify:
- Married couple $117,240
- Single person $2,000
- For long term care benefits, Medicaid limits where you can receive car
- The state may seek reimbursement from your estate for benefits paid to you
So how can an advisor help a pre-retiree or retiree handle the healthcare burden? First, not just any advisor is equipped to do the right planning with the proper software and strategies to help mitigate risks, while making a retirement income last throughout retirement. It’s important to work with a retirement specialist who can help plan for all of the risks one can face in retirement. Typically the biggest risks we face in retirement are healthcare and more specifically, long-term care. With the right planning, a retiree’s income can be optimized in a tax efficient manner. The monies “found” through better planning strategies, including tax efficiency, can be used to fund healthcare.
It’s critical for the retirement specialist to use software to create a retirement income projection that accounts for the worst case scenario for all the risks, including longevity, inflation, sequence of return, volatility and healthcare/long term care. The goal of the income projection is to create the most efficient retirement income possible so that the monies can cover not only basic living expenses, but the high cost of healthcare in retirement.
The income projection should also maximize a retiree’s Social Security filing, as well as lowering the retiree’s tax rate as much as possible. With proper Social Security and tax planning it’s possible to extend the life of a portfolio by 10 or more years. These additional savings and optimization can be used to cover healthcare costs.
Other strategies to cover healthcare costs include:
- Reverse mortgages
- Annuity products
- Increase 401(k) contributions
Other ways to plan for healthcare costs include:
- Living a healthy lifestyle i.e. eating right and exercise
- Setting up a health saving account
- Drug savings
- Medigap plan can make your costs more predictable
- Use doctors in your plan’s network
