Health Care Costs in Retirement – Projecting for an Uncertain Future
Financial Planning is a profession full of unknowns – you don’t know how the market will perform, you don’t know exactly how much you’ll spend in retirement, and you definitely don’t know what your future health will be. In this piece, we explore some of the ways to plan for what we know, and what we don’t know, about health care costs in retirement.
When picturing their financial future, many Clients may not think to consider their health. Overlooking these considerations can be costly, however, as health care costs can have a profound effect on a Client’s net worth. In fact, health care costs are the leading cause of bankruptcy in the United States. One of the reasons health care costs tend to be overlooked is because when you’re working, your employer often offers health insurance. Indeed, there are plenty of decisions to be made regarding employer-provided benefits, and we’ve written about some of them in previous posts. Today, we focus on the issues you may face when getting health care coverage post-working life.
For almost all individuals aged 65 and older who are not working, Medicare is the best health care solution. In fact, you may be required to sign up for at least part of Medicare within 6 months of your 65th birthday, or face certain penalties. When building our projections of health care costs at Yeske Buie, we use individual Client data to make the best assumptions we can. Some of the factors that affect the projected cost of Medicare are your Adjusted Gross Income (AGI) in retirement and the area you live in. We build a table to project the cost of all parts of Medicare: Part B (Medical Insurance), Part D (Prescription Drugs), and Medigap (not technically part of Medicare, but a necessary part of a robust health insurance plan). Then, we incorporate this table into your full financial plan. For more information on the components of Medicare, we encourage you to revisit our post Medicare: Making Enrollment Make Sense.
Medicare is a sound insurance plan if you’re planning on working until age 65, but what if you’re planning on leaving the workforce sooner? Luckily, there are few different options for health care coverage when you’re not working, and don’t yet qualify for Medicare.
While the name of this program might elicit visions of a large reptile, those thoughts are probably less intimidating than its full name, or Consolidated Omnibus Budget Reconciliation Act of 1985. To avoid that mouthful, we’ll stick with the snake. COBRA allows an employee to extend their coverage from their previous employer for 18 to 36 months, depending on some specific circumstances. The catch is, of course, that the now ex-employee is responsible for the costs of the health care plan. And, the previous employer is allowed to charge the ex-employee up to 102% of the plan’s cost. Luckily, COBRA also covers spouses, children, and other dependents. As such, COBRA coverage is great in a pinch. If you unexpectedly find yourself separated from your employer, you know you can stay covered while you search for better options.
Affordable Care Act
Another option for health care coverage before age 65 is the Affordable Care Act (ACA). The ACA may not exist in its current form forever, but we have no choice but to project using the best current information available. For individuals under 65 who are not working, the ACA is often the best avenue to procure health insurance. Similar to Medicare, we can project the costs of coverage using information like income, location, and number of dependents. We can also project the costs using different levels of co-pays, or how much the insurance company pays for a medical expense. The higher the amount you pay out-of-pocket for an expense, the lower your monthly premium. While you can’t know how often you’ll need coverage, you can make informed choices about what kind of coverage to elect based on your emergency reserves and cash flow.
As you approach retirement, we hope that you’ll be spending your time daydreaming about all of the ways you can Live Big® with your newfound free time, not having nightmares about finding health insurance. If you do find yourself worrying about health care costs, know that we at Yeske Buie are here to think with you as you navigate through the unknowns and moving pieces of health care costs in retirement and will work to help you find the best solution.