In a recent poll conducted among retirees or those nearing retirement, the top three concerns voiced were about having enough money, how to spend their time, and the cost of medical care. We have all talked with our elderly friends and family only to hear stories of how their calendars are full of visits to one doctor or the other, for this or for that. As we approach retirement now ourselves, we may find ourselves asking, “Who pays for this?” or “How can we afford health insurance as retirees?”
For all or most of our working lives, we have had health insurance coverage provided by our employer. We may have shared in paying a portion of the premium, but the coverage was available. The United States government has now even stepped in and said everyone must be covered by medical insurance or face penalty. But, when our employment ends and our coverage ends, we ask “Now what?”
Up until recently, often times big American employers would offer health benefits to retirees as part of their retirement package. This percentage is shrinking at an alarming rate due to the rising costs of insurance.
Medical Insurance for Retirees: What Are the Options?
COBRA is an acronym for Consolidated Omnibus Budget Reconciliation Act, a federal law that gives you the option of continuing on your employer’s health plan for at least 18 months. Generally, this law applies to firms with at least 20 employees. But instead of your employer paying the premiums, you are responsible for 100% of the total premium, and the insurance company can add on another 2% to cover administration fees.
In reality, this will almost certainly be cheaper than buying the coverage on your own. Remember, it only last 18 months. To find out what your monthly COBRA premium would be if you retired today, contact your employer’s benefits department.
Medicare is the federal program providing medical coverage for seniors age 65 and over (it also covers the disabled). Your Initial Enrollment Period begins 3 months before the month you turn 65 and ends 3 months after the month you turn 65. If you are not 65 years old at the time of retirement, you will need to find alternate coverage until your reach that milestone birthday. Individual insurance can be a very costly proposition, especially if you’re in poor health. (See Individual Coverage below)
Medicare includes a mind-numbing maze of coverage, rules and regulations. For simplicity, here is helpful summary. Basic Medicare comes in two primary parts, and two more optional parts.
Medicare Part A – provides coverage if you’re hospitalized. You pay no premium (assuming you paid Medicare taxes while working).
Medicare Part B provides coverage for doctor visits and other “outpatient” costs such as physical therapy, plus some preventive costs such as diabetes testing. In 2015, most people can expect a monthly premium of $104.90 for part B.
Medicare Part D provides prescription drug coverage. It is a separate policy you buy from a private insurer if you want it.
Keep in mind that even with Medicare coverage you will still be paying yearly deductibles and copayments. There are also services that may not be covered. Often retirees opt for an add-on policy, known as Medigap.
There are 12 standard Medigap policies to choose from (Medigap A – Medigap L). Medigap A is the most basic, and each successive plan B àL adds something more. You pick an insurance company and the Medigap coverage that fits your needs. The details of each plan are set by the government, so you should not see too much difference between different insurance companies. Do note if you are a resident of Massachusetts, Minnesota or Wisconsin, these states offer different coverage than the other 47 states.
If you and your spouse want Medigap coverage, you’ll need to buy separate policies; spouses aren’t covered together. The cost will vary depending on where you live, your health and, of course, the specific plan you choose.
To learn more about how Medigap works (and get a quick tour through the world of Medicare), visit Medicare.gov.
If you’re not 65 at the time you retire, you will need to find your own coverage (if COBRA is not an option or has been exhausted). There are many options for early retirement health insurance, but the cost is high. The exact amount can vary quite a bit depending on how healthy you are, etc.
To find a plan that works for you, you can start by contacting an independent insurance agent to work with. They should be able to find coverage that meets your needs. You can also visit a website such as EHealthInsurance.com which will take you to an Obamacare search.
To keep your premiums affordable, your best bet may be a high-deductible insurance plan coupled with a Health Savings Account (HSA). For example, this may mean you are responsible for the first $5,000 in expenses annually, but you’ll be protected from big-ticket disasters. With an HSA you can make tax-deductible contributions each year to pay for current and future health care costs. What you don’t use in any given year will stay invested and continue to grow tax-free, assuming you eventually pull it out to use for medical costs.
If you use any withdrawal for non-medical costs it will be taxed when you use it, and if you are not yet 65, you’ll owe a 10% penalty too. So draw on the account to pay medical costs only.
If you can handle the higher deductible and higher annual maximum out of pocket expense, the combination of a high-deductible health plan and an HSA can help you to build up savings to cover the inevitable health care expenses you’re likely to run into during retirement. But these aren’t the only things to consider when deciding whether an HSA is for you. HSAs with high deductibles are generally best for people who are young and healthy. If you’re older and in poor health, getting an HSA is probably not a great idea.
WHAT DOES IT ALL MEAN?
Consult the experts you trust – your financial advisor, your tax preparer, and an insurance agent. Getting sound advice early will help prepare you for what is to come. It would make sense to start saving money today to help cover health costs in retirement. Even when Medicare kicks in, you will be facing some costs, such as premiums, deductibles, co-pays, and out-of-pocket prescriptions.
Fidelity Investments ran the numbers and figured out that a 65-year-old couple who retired in 2009 will need $240,000 of their own savings to handle 20 years of retirement health costs such as Medicare premiums, out-of-pocket costs, and prescription drugs.
What can you do? Live a healthy lifestyle, keep your weight down, quit smoking, etc. Healthier people often find better deals and smaller premiums. Maybe there are some changes you can make now! Check with your doctor on what exercise and/or diet plans may be beneficial for you.
Finally, if you have the opportunity to negotiate the terms of your retirement package, push hard to keep your health benefits as long as possible, because as you can see, extended health coverage can be a lucrative benefit to extending your retirement peace of mind.
If you have some knowledge, experience, or questions regarding health insurance for retirees, I encourage you to enter the discussion below.