Your clients nearing retirement age are hopefully looking forward to many peaceful and rewarding years ahead. However, health care costs could add some unexpected stress to their “golden years.” Let’s dig into the good/bad/ugly news and uncover what you can do to help. We’ll start with the bad news…
Many people close to retirement age may not understand that a significant portion of their Social Security benefits may well be spent on medical costs. How much is a “significant portion”?
In 2018, nearly 1 in 3 retirees spent 35% to 50% of their Social Security benefits on health care, which includes Medicare Part B and Supplemental (Medigap) or Medicare Advantage coverage.1
As far as dollars, it’s estimated that the average 65-year-old couple will need $285,000 saved (after tax) just for medical expenses in retirement. That does not include long-term care.2
What’s The Ugly News About Retirement Health Care Costs?
People live longer (well, that’s good, right?), health care inflation outpaces the general inflation rate, and the average American retires at age 62, which is 3 years before being eligible for Medicare. In fact, 1/3 of “early retirees” (people who claim Social Security at age 62) do so because of health care costs, using it to pay for expenses until age 65, when they’re eligible for Medicare coverage.2
Plus, unlike previous generations, today’s retirees most likely don’t have employer- or union-sponsored health benefits during retirement. Naturally, health care costs consume a larger portion of a retirement budget.2
Big Changes Coming in 2020
The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) states that the sale of Medicare Supplement Plans C and F will be discontinued for new Medicare enrollees on or after January 1, 2020. Medigap Plans C and F plans cover Medicare Part B deductibles, which are estimated to increase from $185 (2019) to $193 (2020). Medicare Part F covers the difference between what a provider charges and what Medicare Part B pays.1
Although current enrollees in Plans C or F will be grandfathered, they’ll likely pay higher premiums for coverage. Two alternatives could be a different Medicare Supplement Plan, such as Plan G which covers excess doctor charges, or a Medicare Advantage Plan, neither of which cover Part B premiums, however.1
Government policy could make an impact
Without diving too deep into politics, health care was the most important issue for voters in the 2018 Congressional elections. And in one recent poll, over 70% of Americans would support “Medicare for All,” publicly financed, single-payer health insurance for all Americans. Although this policy is possible, it’s not likely anytime soon.3 With the current administration threatening to cut Medicare and Medicaid by hundreds of billions of dollars in its fiscal year 2020 budget proposal, it’s uncertain how retirees will be impacted.4
OK, so what’s the good news?
Encourage your client to participate in a health savings account (HSA), if his/her employer offers one. By enrolling and contributing to an HSA, pretax dollars are being saved (there may be employer contributions, too), which can grow and be withdrawn tax-free if used for qualified health care expenses.2
If your client can postpone retirement until 65, Social Security benefits may be deferred. In general, the longer someone can wait until age 70 to take Social Security benefits, the more that can be collected, assuming a long life is lived.2 However if your client retires prior to age 65, he/she will need to find coverage until eligible for Medicare. Available options include a spouse’s health plan, continuing COBRA, the public marketplace, and private insurance.2
People age 50+ may be able to make up for savings deficiencies in two ways: make additional catch-up contributions to a 401(k) or IRA and make an additional $1,000 contributions annually to an HSA.2
As an advisor, you can help clients of any age start preparing for inevitable retiree health care costs. Help them understand that spending may fluctuate from year to year during retirement as medical bills increase. It’s an important discussion to have sooner rather than later.
Want a resource to help get the conversation started? 5 Strategies for Physical and Emotional Wellness in Retirement is a client-friendly guide that speaks directly and plainly, helping clients set realistic expectations. Click the link below to access your copy.
1 ThinkAdvisor, The Good News and Bad News About Retirees' Health Care Costs, April 2018
2 Fidelity, How to Plan for Rising Health Care Costs, April 2019
3 Health Affairs, What Do The Midterms Mean For Medicare For All?, December 2018
4 AARP, Budget Proposal to Slash Medicare, Medicaid Unlikely to Fly, March 2019