Concerns over health care in retirement are on the rise, and looking at the health care cost increase over the past few decades, it seems such concerns are not unwarranted. Another unfortunate effect of the cost increase is that employers are dropping the option to continue health coverage into retirement. Currently, only about 35% of employers are offering this option, down from 66% two decades ago. This puts the onus of retirement health care planning squarely on the individual.
Health Care Costs in RetirementThe cost of health care during one's golden years obviously depend on one's general health going into retirement. On average, the Employee Benefit Research Institute (EBRI) estimates that an average 65-year-old couple can expect to pay $163,000 in out-of-pocket expenses for health care during retirement. This number does not include long-term care, such as a nursing home.
Retirees with some leftover employee benefits face an average cost of $552 per month before age 65, which drops to $227 per month after 65 (thanks to Medicare taking some of the burden). Those with no employee benefits looking to buy a private health insurance policy may be looking at four figures per month.
MedicareMedicare provides basic health care for retirees over age 65 and comes in four parts, A through D. Medicare part A is free (if you've paid into the Social Security pool for at least 10 years) and covers basic hospitalization. Everybody gets part A at age 65. Part B is optional with a monthly premium depending on income. This part covers doctor visits, physical therapy, diabetes testing and similar procedures.
Part C, also known as Medicare Advantage, is a private plan, run by an insurer, that is overall equal to parts A and B, except select areas where it may extend better coverage. For example, an insurer may include everything found in plan B, but add on prescription drug coverage for a higher premium. The insurer has some freedom in dialing back certain coverage elements to make up for the improved parts; read each offering carefully before deciding. Part D is standalone coverage for prescription drugs from a private insurer.
Medicaid is a support program for low-income, low-asset individuals who would otherwise not be able to afford the premiums of the regular Medicare system. Eligibility varies by state; see the Medicaid website for more information. Medicaid also covers long-term care costs, both for a nursing home and at-home care, which Medicare does not. Medicaid doesn't cover prescription drugs, but it may pay the premiums to enroll in part D.
Medigap is another category of supplemental Medicare coverage offered by private insurers. There are 12 pre-packaged standalone policies very similar to those baked into the broader plan C offerings described above. The contents of each of these standalone policies are the same, as determined by the government. As a rule, anyone who opts for a plan C solution should skip Medigap; the level of redundancy is too high to make it worthwhile.
Health Savings AccountsHealth savings accounts (HSAs) are a tax-friendly way to set money aside for medical expenses during retirement. HSAs are similar to 401(k) retirement plans in that the contribution is taken straight out of the paycheck on a pretax basis, sometimes getting a matching contribution from the employer, and deposited into the account where it grows tax-free until used. It is also possible to set up an HSA with a bank or similar financial institution. An HSA builds a tax-free personal nest egg earmarked for medical expenses, no matter what comes down the road. The contribution limit in 2015 is $6,650 (married filing jointly), while those 55 and over get an extra $1,000.
Early RetirementThose opting for retirement before age 65 face a particular dilemma; they don't qualify for Medicare yet, but they are at the age when the risk of age-related ailments are beginning to spike.
One option for those aged 63.5 or older is to extend health coverage from their former employers through the Consolidated Omnibus Budget Reconciliation Act (COBRA) until Medicare kicks in. This extended coverage is more expensive than what an active employee would pay, but it is much less expensive than a private policy would be. An added benefit of COBRA is that it is identical to the previous plan, so the person keeps the same doctor and coverage of prescription drugs with no concerns about pre-existing conditions.
The State Health Insurance ExchangeAnother option is to purchase insurance from the state's health insurance exchange. The 2014 health insurance laws changed a lot in this regard, limiting insurers' rights to deny applicants, putting a cap on how much more they can charge elderly customers compared to younger customers, and several potential subsidies for those earning 100 to 400% of the federal poverty limit ($11,670 to $46,680 for 2015). The website Healthcare.gov is a central hub for shopping for health insurance by state under the new laws.
Affordable Care ActIn addition to the changes mentioned above, the Affordable Care Act (ACA) has added free services for the elderly. These include screenings for several types of cancer, bone density, diabetes, cholesterol and more, while fixing the dreaded hole in prescription drug coverage in Medicare. Get an overview of the new ACA coverage from the U.S. Department of Health & Human Services.
Long-Term Care InsuranceHealth insurance typically doesn't cover long-term care, such as nursing homes or in-home care. Medicaid recipients get long-term care coverage, but those who fail to meet the criteria for Medicaid coverage are left to finance such care themselves. Nursing home costs run, on average, over $80,000 per year, and in-home services often cost $25 per hour.
Long-term care insurance is costly, but it can shield retirees from burning through their nest eggs prematurely in certain situations. For example, suppose an elderly man suffers a stroke and require extensive care, but his wife is unable to provide that level of care. With long-term care insurance, the couple would get in-home assistance without draining their savings.