February 15th, 2016
To view the original article click here:
5 Ways to Ease the Pain of Health Care Costs in Retirement
This number should hurt a lot: The average 65-year-old couple will pay $240,000 in out-of-pocket costs for health care during retirement, according to Fidelity Investments. And that does not include potential long-term-care costs.
Critical, yes. Incurable, no. The worst thing you can do is take to your bed and expect the pain will go away with an aspirin or two. The best medicine is to make sure your retirement plan takes into account this large line item — and to find ways to cut future costs or develop income streams to pay expenses.
It’s easy to see how the costs can add up. Just Medicare premiums alone for 25 years — for standard Part B (which pays for outpatient care), a Part D prescription-drug policy and a Medigap supplemental insurance policy — will set a couple back close to $200,000. And that does not include dental and vision care, hearing aids, and out-of-pocket drug costs. A Medicare Advantage plan could cost somewhat less. Thank goodness Part A, which pays for hospital care, is free.
Set up a special fund. You can create a retirement health care kitty with a health savings account. Your contributions are tax-deductible (or pre-tax if through an employer), the money grows tax-deferred, and you can withdraw the money tax-free for medical expenses in any year.
To make HSA contributions in 2016, you must be covered by an HSA-compatible policy with a deductible of at least $1,300 for single coverage or $2,600 for family coverage. You can contribute up to $3,350 for single coverage or $6,750 for family coverage, plus a $1,000 catch-up contribution if you’re 55 or older.
You can no longer contribute once you’re on Medicare, but you can use the money to pay for medical expenses at any age. Those costs include deductibles, co-payments, dental expenses and Medicare premiums (but not premiums for Medigap plans).
Make the most of the tax benefits by paying for current medical expenses with cash and letting the money grow in the HSA. If you keep the receipts, you can reimburse yourself from the account for any eligible expenses since you opened the HSA — even years later. “For folks who are nearing retirement, that’s a way to accumulate some real money,” says Eric Dowley, senior vice-president of health savings accounts for Fidelity.
Building up their HSA has been a key strategy for Bob and Debbie West of Ellicott City, Md., both 65. For many years, they have worked with spreadsheets estimating retirement expenses, and they predict they will need more than $250,000 for health care. They’ve been maxing out their HSAs since Bob retired four years ago and bought a high-deductible plan. “The HSA was an additional benefit,” he says. “Not only has that been a great deduction at tax time, I now have a nest egg to use for my out-of-pocket medical and dental expenses in retirement.” Now enrolled in Medicare, the couple can no longer make HSA contributions.
The savings are eye-catching. Say you contribute the 2016 maximum $7,750 a year from ages 55 to 65, and the money earns 3% a year. At 65, you go on Medicare and don’t touch the account for 10 years. At 75, you’ll have more than $120,000 tax-free to pay for medical expenses.
Avoid the surcharge. Most Medicare beneficiaries will pay a total of $1,258 for Part B premiums in 2016. But the premium tab will be considerably higher if your adjusted gross income (plus tax-exempt interest) exceeds $85,000 if single or $170,000 if filing jointly. In that case, your premium will range from $2,046 to $4,677 for 2016 per person, depending on the size of your AGI. You’ll also pay a surcharge for a Part D drug plan.
Large premiums can throw your retirement financial plan off track. “Most people are unaware of the surcharge,” says Ron Mastrogiovanni, chief executive officer of HealthView Services, which helps financial advisers estimate retirement health care costs. “Or they think they won’t have to worry about it because they won’t be earning that much in retirement.” But it’s easy to reach the surcharge threshold if you have a taxable pension and are withdrawing money from tax-deferred 401(k)s and IRAs.
Retirees and current beneficiaries can take a number of steps to keep their income under the threshold — or at least at one of the lower of four premium rungs. One strategy is to build up a tax-free stash of money for retirement. Withdrawals from a Roth IRA, Roth 401(k) or health savings account are not included in your AGI. So it could make sense to contribute to a Roth or an HSA before you enroll in Medicare — and tap those accounts in years when your AGI threatens to exceed the threshold. You also could gradually convert money from a traditional IRA to a Roth through the years.
Another way to keep your AGI on the lower side is to donate your IRA required minimum distribution to charity. People age 70 1/2 and older can now transfer up to $100,000 from their IRAs to charity each year. The donation isn’t included in your AGI.
If you are hit with the surcharge after you retire, consider asking the government to reduce it. The Social Security Administration uses your most recent tax return on file to determine whether you’re subject to the surcharge (generally the 2014 return for the 2016 premium). But you may be able to contest the surcharge if your income has dropped since 2014 as a result of a “life-changing event” — such as a marriage, divorce or retirement. You can ask Social Security to use your more recent income instead. Submit your tax return for the year, or estimate the income if you haven’t filed yet.
Save on drugs. It’s likely that your drug costs are rising, whether you’re covered by Medicare, an employer plan or an individual policy. When choosing a plan, be sure you understand how much you may pay out of pocket. A $20 “co-payment” for a $200 drug will be far less than 20% “co-insurance” for the same drug.
Ask your doctor about generics. Generic drugs can cost 85% less than brand-name versions and usually have a much smaller co-pay — generally $10 or less for a 30-day supply.
If you shop for your generic drugs at Walmart, Costco or Target, it may cost you less if you pay directly than if you use insurance. A Walgreens prescription savings club also may offer good deals. GoodRx.com provides coupons and helps you search for the pharmacy with the best deal for your medications.
Most insurers, including Part D plans, have preferred pharmacies, which have lower co-pays than other in-network pharmacies. For instance, you may pay a $1 co-pay for a preferred generic at a preferred pharmacy and pay a $10 co-pay for the same preferred generic at an in-network pharmacy. A mail-order pharmacy may cost even less — but not always.
If there’s no generic for your medication, “ask your doctor if there are other medications that are equally effective but may be on a different pricing tier,” says Christopher Abbott, chief executive officer of United Healthcare Medicare and Retirement.