How Paying For Health Care Changes in Retirement

February 27, 2017

For most American workers who retire at age 65 or later, managing the costs of medical care becomes a bit more complicated. There may be more paperwork to juggle as reimbursements for costs could come from different sources. Here’s a breakdown of what’s typical:

Medicare

Most American workers and small business owners will be eligible for Medicare, the federal health insurance program for people age 65 and older. Medicare has four parts: Part A is Hospital Insurance, Part B is Medical Insurance, Part C includes Medicare Advantage Plans (HMO/PPO type plans which provide hospital and medical insurance together) and Part D is Prescription Drug coverage. See this article on understanding how Medicare works. Things to keep in mind include:

As you near age 65, you’ll need to decide if you want the original Medicare or a Medicare Advantage Plan and if you want prescription drug coverage.
Generally, the initial sign up for Medicare begins three months before you turn 65 and continues for three months after the month you are 65.
If you don’t sign up for Part B during your initial enrollment period, you may have to pay a late enrollment penalty.

Medigap

A Medical Supplemental Insurance (Medigap) policy helps pay some of the health care costs not covered by original Medicare, such as co-pays, deductibles and co-insurance. Medigap policies are sold by private companies. Keep in mind:

Medigap policies generally don’t cover long-term care, vision or dental care.
You can’t be enrolled in a Medicare Advantage program and a Medigap policy at the same time.
Medigap policies sold after January 1, 2006 cannot include prescription drug coverage. If you want that, you’ll need to sign up for it separately.

Retiree Health Plan

Employers are not required to provide health coverage to retired employees, and most don’t. If you are lucky enough to be one of the 16–25 percent of Americans who receive retiree health benefits from a former employer or union or receive military or other veterans’ benefits, how your coverage works in conjunction with Medicare depends on your company or organization’s plan. Generally, if you are retired and have coverage from both Medicare and a retiree health plan, Medicare pays first for your medical bills and your group health plan is the secondary payer. Keep in mind:

Get a copy of your plan’s benefits description and read it carefully. Make sure you understand how your plan is integrated with Medicare.
Employers can change benefits or premiums for your retiree health program or even cancel coverage.
Your retiree plan may not pay unless you enroll when eligible in both Medicare Part A and Part B.
Find out before retiring if/how your retiree plan covers your spouse and any dependents (if you have them).

Health Savings Accounts

For those employees who have balances at retirement in their health savings accounts (HSA), they are a highly tax-advantaged source of funds to pay health care expenses in retirement that are not reimbursed by Medicare or other insurance. HSA funds are triple tax-free if used for qualifying medical expenses: they are contributed pre-tax, grow tax-free and are withdrawn tax-free. During your savings years, there are good reasons to consider maxing out your HSA before other retirement accounts. Keep in mind:

Tax-free withdrawals from HSAs can help you manage your overall tax rate in retirement and could help you meet thresholds for lower marginal and capital gains tax rates on other income.
If you have built large balances in your HSA and don’t need all the funds to pay for medical expenses, you can withdraw funds after age 65 without penalty. (Withdrawals are included in your taxable income like retirement plan distributions.)
HSAs do not have required minimum distributions.
You may use HSA funds to pay for tax-qualified long term care insurance premiums.

Deducting Medical Expenses

Those taxpayers who face significant unreimbursed medical expenses can deduct some of those expenses. The IRS allows taxpayers to deduct qualified medical expenses which exceed 10 percent of your adjusted gross income for the tax year. For example, if you have a household income of $50,000, you would be able to deduct medical expenses in excess of $5,000. Keep in mind:

You must itemize your deductions on your tax return.
Expenses such as prescription drugs, dental care, vision, mental health care, glasses, hearing aids and preventative health care are included.
Payments for medical insurance, such as long term care insurance (see below), are generally included.

Long Term Care Insurance

LongTermCare.gov defines long-term care insurance as insurance which covers “long-term services and supports, including personal and custodial care in a variety of settings such as your home, a community organization, or other facility.” Medicare does not cover long term care. Keep in mind:

The best time to purchase long term care insurance is in your fifties.
If you don’t have an HSA, the amount of long term care premiums you can deduct from your taxes, subject to the 10 percent floor, increases with age.
You can generally pay for LTC premiums from your HSA account, subject to the same annual age-based limits.
For very low income retirees without assets, Medicaid may pay for some of the costs of long term care depending on the state, but most retirees will have to fund the costs of long term care themselves should they need it.

Do you have a question you’d like answered in this column? Please email me at [email protected]. You can follow me on our Financial Finesse blog by signing up here, and on Twitter@cynthiameyer_FF.

What’s Your Lifetime Medical Expense Plan?

October 14, 2016

I got a phone call from my daughter (senior in college) not too long ago, relatively late at night, asking me if I could text her a photo of my HSA card. I figured she was heading to the pharmacy to pick up some antibiotics for a sinus infection. But when I heard Nick & Danny (two of her roomies) screaming in the background to get towels and try to stop the bleeding, I learned that her calm exterior was masking something bigger. It turns out that she eventually needed a whole bunch of staples and some glue to close up the large gash in her leg acquired when opening a box with a large knife when she couldn’t find her small scissors. She’s back to walking normally now so the crisis is over and she’s back to her normal daily activities.

It’s amazing to me how many different bills can come in from one injury. There were bills from the hospital (supplies, etc.), the ER department, the physicians group who treated her and a few others that I’m sure I’ve forgotten. The incoming mail probably hasn’t come to a complete halt just yet.

While I have an emergency fund set aside for emergencies (what else would it be for?), in the heat of the moment, I wasn’t thinking “let me pull money from my emergency fund so that she can get treated at the hospital.” I was thinking “Holy ****! My daughter’s roomies are screaming and she’s got the calm “something’s wrong” demeanor. I need to get the hospital paid right now so that they see her.” So I used my health savings account card to pay for the trip to the hospital.

I deviated from the logic and reason that I use in my normal budgeting process. In the heat of the moment, I “messed up.” But the good news is that I had my health savings account there as a backup. That wasn’t consistent with my long term plan, but I’m not going to look back with any regret.

My long term plan with my HSA is to build a pool of $100,000 or more before I retire. I plan to make the maximum contribution every year, pay for medical expenses from either my checking account or my emergency fund (if it’s a big one) and invest the balance for growth. Once I retire, the HSA will be there to pay for medical expenses for the rest of my life…or at least a good portion of the rest of my life.

What’s your plan to pay for medical expenses for the next 20, 30, 40 years or more? I have an outline of what I plan to do. I encourage you to come up with your own personal “lifetime medical expenses” plan. Here are some ways that people have told me that they plan to pay for medical care:

Health savings account – that’s the one that I’m planning to use.
Emergency savings – building up a large emergency savings fund, well beyond the 3-6-9 months of expenses, is what several people have told me that they plan to do to pay for their healthcare in retirement.
Large income streams from Social Security, pension and investment accounts while minimizing expenses – that’s the game plan for a few folks I’ve talked to recently.
Moving to Costa Rica, Panama, or some other foreign country where healthcare quality is good but costs are significantly lower.

These are just a few of the many ways people have told me that they are planning to cover medical expenses over the rest of their lives. I’m sure there are others. What’s your plan?

Are HSAs Still a Good Deal?

August 29, 2016

A few years ago, my colleague Greg Ward wrote a blog post called Why I Max Out My Health Savings Account (And You Should Too). In the past, health savings account (HSA) eligible health plans were a lot less expensive than their traditional counterparts, but premiums for HSA-eligible plans have recently gone up, and as a result, the difference in the premiums is not always as great as it was in the past. This has caused some readers to question whether or not Greg still believes the HSA is a good deal. Here is his response to a recent inquiry he received regarding this issue:

The reader writes:

“I’m really struggling to understand all of this. You have to have an HSA insurance plan to have the HSA, but the premiums and deductible are still really high and it doesn’t cover very much so I feel like I’m missing something. Also, are you still suggesting that we max out our contributions to the HSA but then not use the money for qualified expenses or are you incurring the expenses and then having them reimbursed later? It seems that a person will have to be a meticulous record keeper or it just won’t work…or you’ll get audited…or penalized. Am I right to be this worried??”

Here’s my response:

Hi [Reader],

Thanks for your comments. It is true that you must be enrolled in a high-deductible plan in order to be eligible to contribute to a health savings account (HSA). In general, the higher the deductible, the lower the premium, so while your premiums for a high-deductible plan may seem “really high,” they should still be less than their lower-deductible alternatives. Since the participant bears more of the financial responsibility under a high-deductible plan, they are more appropriate for healthy families that do not incur a lot of out-of-pocket expenses for healthcare services.

For example, let’s say my HSA-eligible plan costs $600 a month and my traditional plan costs $1,000 a month. If I incur $3,000 of out-of-pocket expenses for the year, my total cost under the HSA-eligible plan would be $10,200 versus $12,000 under my traditional plan (assuming the traditional plan covered the $3,000 of out-of-pocket expenses). The less I incur in out-of-pocket expenses, the greater the savings under the HSA-eligible plan (and vice versa).

Since my need for healthcare services will likely be greater in the future, such as in retirement, I choose not to use my HSA funds for current healthcare expenditures. That way I can invest the money so that I have more of it in the future. As long as you are not using the funds for unintended purposes, you probably don’t need to worry about an audit or penalty.

I hope that gives you more confidence to use the HSA if you’re eligible, but don’t let the HSA tail wag the health insurance dog. You should choose your health insurance based on your anticipated need for services. If you have an ongoing need for health care that will meet or exceed your deductible under an HSA-eligible plan, then a traditional plan may be more appropriate.

As you can see, I still believe in the HSA. I recognize that with premium disparity, the decision may not be as cut and dry as it’s been in the past. That said, if you (and your family) are healthy, and you feel comfortable investing your HSA dollars for future healthcare expenditures, I strongly believe in the value of this health insurance option.

Why Health Savings Accounts Are Such a Great Deal

August 10, 2016

Health savings accounts have been around for several years now, but we still find that there are plenty of people out there who don’t understand how they work or why they can be such a great deal. We are lucky enough to have access to them at Financial Finesse and my colleagues with great health and relatively little expenses simply love the plan. Here’s why: it’s a high-deductible plan connected to a health savings account (HSA), a plan type that is becoming more and more common as traditional insurance premiums continue increasing.

In our case, our company pays lower premiums because we have to spend $3,500 each year before the insurance even begins to cover us. That doesn’t sound like a great deal for us employees though, huh? That’s what a lot of people originally think too. But the other side is that our employer uses the savings to put $2,500 each year into a health savings account for each of us that we can then use to pay that $3,500 deductible. As a result, we would only have to pay an additional $1,000 to reach the deductible, and that’s only after our healthcare costs exceed $2,500.

The best part is that we pay no taxes on this money and unlike FSAs, we get to keep whatever we don’t spend in our account. That doesn’t mean you can take the money and splurge it on a nice vacation (at least not without paying taxes plus a 20% penalty on it). But it does mean you can invest that money in your HSA tax-deferred until age 65, when you can then spend it on retirement without penalty, use it tax-free for medical expenses (which Fidelity estimates will be about $245,000 over the remaining lifetime of a 65-yr old couple without retiree health insurance), or just let it continue to grow tax-deferred.

The interesting thing is that it changes your whole view on health spending. Normally, you probably just go to the doctor when you feel sick and don’t think much about costs since someone else (the insurance company directly and your employer indirectly through higher premiums) is paying. Think about how you’d spend if other areas of your life worked that way (as someone who loves to eat out, I wish my company provided us food insurance). Instead, when the dentist asks when the last time you had your x-rays done, you’re more likely make sure you know the answer before paying for x-rays you don’t need.

Annual wellness visits are free of charge by law. If you rarely get sick, you may not have to spend any money at all while still keeping up on your vital visits (and banking those employer contributions). You can also use your HSA for medical expenses as well as on your spouse and dependents even if they’re not covered on your health insurance plan.

Another thing I love about HSAs is that an individual at my company can also add another $850 to it each year since the limit is $3,350 per year for a single person. If you have the deposits deducted from your paycheck, you also don’t have to pay the 7.5% payroll tax on it. Not even 401(k) contributions let you do that. When you consider that HSAs offer you both pre-tax contributions AND the potential for tax-free withdrawals, there’s an argument for funding it even ahead of your 401(k) (after you’ve maxed the match, obviously) or IRA.

So what’s not to love? Apparently not much. With two caveats: make sure you have at least enough cash on hand to pay each year’s out-of-pocket maximum and if you have latent health conditions like I do, consider switching to a lower-deductible plan when your healthcare needs are projected to grow.

All I Wanted For Christmas Was… a Flu Shot?

January 07, 2015

For years my friends and colleagues have been telling me to get a flu shot at the onset of flu season and for years I’ve been ignoring them, reluctant to do so for fear of somehow reducing my immunity to the virus or worse yet contracting the flu from the shot itself. Now before you start sending me nasty emails telling me I’m wrong, let me just say that the Center for Disease Control has beat you to it. The truth is our family has been relatively healthy throughout the years, and my wife and I figured that all the hubbub over the flu shot was to create demand for something I really didn’t think most people needed. In fact, the only reason I received my first flu shot last year was to appease my loving neighbor who insisted I get one prior to flying out for business. Continue reading “All I Wanted For Christmas Was… a Flu Shot?”

When Planning Really Matters

November 25, 2014

Last week, a colleague of mine lost her best friend to cancer. She was one of those people whose presence made you feel at peace. She also was great at planning for the future. Continue reading “When Planning Really Matters”

7 Steps For Baby Boomers to Secure Their Financial Future

January 14, 2014

This week, Financial Finesse is releasing our second annual generational research report so over the next few days, we’ll be addressing in our blog how each generation can overcome their unique challenges and take advantage of the opportunities they face. Today, we’ll start with the Baby Boomers, the last of whom will be celebrating their big 5-0 this year. In addition to now being able to apply for their AARP cards for discounts on eating out and travel, here are some more critical tips for their financial wellness: Continue reading “7 Steps For Baby Boomers to Secure Their Financial Future”

Lessons From Detroit

December 06, 2013

Recently, a judge allowed the City of Detroit to remain in bankruptcy court which will allow the city to try to find a solution for an $18 billion debt problem. As a part of the solution, the pension benefits for a lot of retirees and current workers may be significantly reduced. The city is in serious financial trouble and without some sort of drastic measures, it might never recover. Continue reading “Lessons From Detroit”

5 Financial Blessings to Be Thankful For Today

November 28, 2013

We may have evolved to focus on the bad things in life (our more cautious ancestors were more likely to survive and reproduce) but today is a time to give thanks for the good things that we too often take for granted. This applies to our financial life too. Here are 5 financial blessings we can be thankful for this Thanksgiving and some steps you can take to make the most of them: Continue reading “5 Financial Blessings to Be Thankful For Today”

The Importance of Staying In-Network

September 17, 2013

My husband Dave recently broke up with our family dentist, and it wasn’t his idea. He felt jilted when he got a letter in the mail a few months ago notifying him that Dr. Muller was no longer going to participate as an in-network provider through his employer’s group dental insurance. In the letter, Dr. Muller encouraged patients to continue to see him, just not with the advantage of the negotiated rates. Would it really make that much of a difference? Continue reading “The Importance of Staying In-Network”

What Another Obama Term Could Mean For Your Wallet

September 13, 2012

With the party conventions now over and the presidential election cycle in full swing, you may be wondering what the candidates’ plans might mean for you personally. Last week, we looked at how a Mitt Romney presidency could affect your wallet and this week we’ll do the same for a second Barack Obama term. Let’s start with the good news: Continue reading “What Another Obama Term Could Mean For Your Wallet”

The Intersection of Health and Wealth Planning

August 21, 2012

An interesting topic I heard repeatedly at this month’s ISCEBS Symposium in San Francisco had to do with the concern of future health care costs becoming a critical variable in the retirement income equation. Several of the major plan providers held sessions that focused on the next generation of retirement planning tools that will be needed to recognize and personalize health-related issues. By now, most of us have heard the estimate of close to a quarter million dollars that a 65 year old married couple may face in out-of-pocket health costs throughout the rest of their lives. But since that’s an average, some will need much more. Some will need much less. This will depend on the health and medical needs of the retired couple, so that is why Putnam Investments has recently introduced a new retirement calculator that incorporates 7 data points from a health risk assessment into the income needs formula to estimate future projected healthcare expenses. Continue reading “The Intersection of Health and Wealth Planning”

What’s Scarier Than Monsters??? Numbers…!

May 18, 2012

When I was growing up, I was surrounded by numbers and I actually liked that. (Yes, I’m admitting that I’m a geek from way back.) My friends and I could tell you the batting average of almost any member of baseball’s Hall Of Fame and the stats of major NFL players, compute a pitcher’s ERA in our heads or talk about the winning percentage of various great teams throughout history. Numbers were fun! Numbers were cool! (To us, at least…) Numbers were all that was right with the world back then…Last week, I read an article about the cost of healthcare during retirement and those numbers scared me! Continue reading “What’s Scarier Than Monsters??? Numbers…!”

Take Three of These and Call Me in the Morning

February 08, 2012

Recently, I took a trip to the urgent care center. I think someone should sue them for false advertising because there was nothing “urgent” about it. I’d been warned that wait times to see a doctor could get lengthy, but when I pulled into a vacant parking lot and walked into an empty waiting room I was beginning to feel optimistic. I was even more hopeful when I was called into the examination room after spending just 15 – 20 minutes in the waiting area. Sadly, I discovered the rumors were true; I sat in examination room #2 for over 75 minutes before being seen. Continue reading “Take Three of These and Call Me in the Morning”