When you draw up a retirement spending budget, you're likely to
account for utilities, car insurance and lawn care. But have you
given the cost of health care a hard look, or are the numbers too
scary to contemplate? Once you get real about those expenses, you
may want to delay your targeted retirement date by a year or
5 Ways to Reduce Retiree Health Costs
On average, a couple retiring at 65 can expect to spend $220,000
on health care costs during retirement -- and that does not include
long-term-care costs, according to new estimates by Fidelity
Investments. That number remains unchanged from last year, but it's
still a sobering figure.
This year, Fidelity added a new twist to its calculations. The
firm estimates that the average couple who retire at age 62 can
expect to spend $17,000 a year on out-of-pocket health care costs
until they enroll in Medicare. Those costs would include the
premiums for policies the couple would need to buy on the
individual insurance market once employer-sponsored coverage ends,
as well as co-payments, deductibles and other costs. This average
does not take into account any tax subsidies the couple could
receive on the state-based exchanges under the Affordable Care
Those contemplating early retirement should consider those costs
before taking the leap. If you're planning to keep your insurance
under COBRA after you leave your job, the costs won't be much
different, says Sunit Patel, senior vice-president of Fidelity
Benefits Consulting. The $17,000 estimate helps people "gain
insight" on the costs of retiring before Medicare kicks in.
Fidelity also estimates that a couple could save $10,000 for each
year they delay retirement until age 67.
Here are some strategies you can employ to ease the pain of
health care costs in retirement.
Create a budget. Once of the most important moves for
pre-retirees is to "make sure that their financial plan explicitly
accounts for health costs in retirement," Patel says. When
preparing a budget, include a line item for health care. Some costs
are relatively fixed, such as Medicare premiums. Remember
inflation, which tends to rise faster for health care than the
general inflation rate.
Also be prepared for unexpected spikes in costs, such as a
$10,000 dental bill. Medicare does not cover dental or vision care.
Nor does it cover long-term care. Be sure to set aside a large
emergency reserve that you will not include when you calculate your
monthly retirement expenses.
Fill in the gaps. If you're going with traditional Medicare, buy
a private medigap supplemental insurance policy. These private
plans will cover many of costs that Medicare does not cover, such
as deductibles and co-payments, and will reduce the volatility of
your health care costs. Expect to pay about $150 a month, depending
on the plan and the region. You can save money on premiums for
these plans by choosing a higher deductible.
Go with Medicare Advantage. These private insurance plans tend
to be cheaper overall than a combination of traditional Medicare, a
Part D plan and a medigap supplemental insurance policy. Currently,
30% of all Medicare beneficiaries are enrolled in an Advantage
plan, compared with 16% in 2006, according to the Kaiser Family
Foundation. And since the passage of the new health care law, all
plans must limit beneficiaries' annual out-of-pocket spending to no
more than $6,700 -- a feature that offers a level of predictability
for retirees looking to calculate their costs. You can compare
costs and coverage of medigap and Advantage policies offered in
your area at Medicare.gov and PlanPrescriber.com.
Buy an annuity. If, after you create your budget, you discover
that you'll likely need additional income, you can buy an annuity
to fill in part of the shortfall -- perhaps for Medicare premiums.
One option is a deferred fixed annuity. You figure out how much
you'll need at some point in the future, and you hand over a lump
sum to an insurance company. You'll get lifetime monthly payments
after your start date.
Say you're 60 and you figure you'll need $400 a month to cover
some out-of-pocket costs starting at age 65. You'd pay $64,000. If
you don't need the payouts until age 70, your cost would be
Some insurance companies are offering annuities with special
health-related features. For example, Liberty Mutual offers a rider
on its Freedom Series Builder deferred annuity that allows you to
withdraw money without paying surrender fees if you or your spouse
becomes seriously ill. Expect to pay extra for this feature,
Tap life insurance. Most permanent life insurance policies allow
you to take partial withdrawals or policy loans to pay for health
care and other expenses. If you take a withdrawal or don't pay back
the loan, you reduce the death benefit for your heirs. With many
policies, you can also accelerate your death benefits if you are
diagnosed with a terminal illness.
Cut your health care spending. Be sure to take advantage of free
services. Under the Affordable Care Act, Medicare offers free
coverage for 20 preventive services, including an annual wellness
exam; screenings for colorectal, prostate and breast cancer; and
flu vaccines. Your private plan on the individual market may also
offer free services and incentives to stay healthy.
If you're an early retiree buying coverage in the individual
market, you can save a bundle by sticking with in-network
providers. You may need to pay the full costs -- or at least a
higher co-payment -- if you seek care outside your plan's provider
Sock away cash. A large number of private plans on the new
exchanges are high-deductible policies linked to a health savings
account. You can set up an HSA at a bank or brokerage firm. You
contribute pre-tax or tax-deductible money to fund the HSA -- up to
$3,300 for singles and $6,550 for a family in 2014, plus an extra
$1,000 contribution if you're 55 or older. Many employers also will
contribute to your account.
You can contribute every year, and the money grows compounded
tax-free. You can withdraw money tax-free at any time to pay for
medical expenses, but why not let it grow? Once you're on Medicare,
you can't contribute anymore, but you can keep the account.
Consider this: If you and a spouse put away $7,550 a year starting
at 55 in an HSA, you'll have about $112,000 in tax-free savings for
medical expenses when you enroll in Medicare at age 65 (assuming a
5% rate of return on your investments, before inflation).