What you can do to offset retirement health costs
It's not your father's retirement, thanks to health care costs.
Once they retire, workers today are less likely than their parents or grandparents to enjoy the standard of living that they did while they worked.
What's going to spoil the party? Health care costs are rising faster than wages. That's the key finding in a report from the Urban Institute and AARP Public Policy Institute. Retiree income is projected to fall from 80 percent of average career earnings for current retirees to 73 percent for future retirees, according to the report. Take into account health care costs and the figure drops further, to 55 percent of average career earnings. And these estimates assume no changes to future Social Security benefits.
Average annual health care costs per person
Source: Report from AARP Public Policy Institute and Georgetown University.
In 2010, national health care spending averaged $8,402 per person. That's 72 percent higher than 10 years earlier, when it was $4,878, and nearly three times the 1990 level of $2,854, according to a study by the AARP Public Policy Institute and Georgetown University.
If only the economy were growing as much as health care spending. Between 2000 and 2010, health care spending per person grew at an average rate of nearly 6 percent a year -- much higher than the 2.4 percent inflation rate.
People 65 and older are the hardest hit. Future retirees are expected to spend 18 percent of their household income on health care expenses, compared to 8 percent for current retirees, according to the report.
The trend is delaying retirement for many. A recent survey from the Employee Benefit Research Institute found that overall, 53 percent of workers said they'd like to tear up their time cards for good, but they'll likely have to continue to punch the clock because they need to keep their employer-sponsored health insurance.
Retirees as well as workers can take the following steps to mitigate the impact of future health care costs.
Assess your health today
Learn how your current health conditions will affect your retirement costs. The typical couple with average drug expenses needs approximately $270,000 to cover medical costs throughout retirement, says Cara Sjodin, vice president of health wealth advisor services with OptumHealth Financial, a United HealthCare Company. But those costs can be much higher for people who are suffering from certain health conditions. For example, a person who smokes, has high cholesterol and is obese may need as much as $150,000 more than a healthy, nonsmoker for health care expenses in retirement, she says.
Explore health savings accounts
Health savings accounts, or HSAs, are tax-advantaged savings accounts that can be used to pay for qualifying medical expenses. They can only be used in conjunction with HSA-eligible, high-deductible health insurance plans. These are defined by the Internal Revenue Service as plans with an annual deductible not less than $1,250 for individual coverage and $2,500 for families. For 2013, the IRS set the annual limit on deductions at $3,250 for an individual and $6,450 for families. If you're 55 and older, you can contribute an additional $1,000. Find out if your current plan qualifies.
What's so great about HSAs? You make a tax-deductible contribution when you put money in. And you build up money tax-free and can take it out tax-free when it's used for qualified medical expenses, explains Paul Fronstin, director of the Health Research & Education Program at the Employee Benefit Research Institute.
Unlike a flexible spending account, you don't lose money you don't use. The money in the account rolls over, is 100 percent portable and can be used anytime during your lifetime to pay for health care as well as long-term care. It can be invested to earn returns or interest tax-free.
The drawback, says Fronstin, is the limit of how much you can contribute to an HSA each year. "You can't bank on a health savings account to solve all your health care needs in retirement. It's only one tool, but a good one."
Also, under provisions of health care reform, popularly known as Obamacare, HSA owners face the same restriction now applied to FSA owners: You can no longer use plan money to buy over-the-counter drugs without a doctor's prescription. And those who withdraw HSA funds for nonmedical purposes will see their tax penalty double, from 10 percent to 20 percent of the total withdrawal.
Check out long-term care insurance
Health and long-term care costs are why essentially half of all retirees die penniless, says Donald Redfoot, senior strategic policy adviser for AARP's Public Policy Institute. Long-term care insurance can help. Some companies have stopped selling long-term care insurance, but you can find policies, though they are getting increasingly expensive. It's cheaper to buy long-term care insurance in your 40s or 50s, rather than waiting until 60 and beyond. Find quotes for long-term care insurance at Bankrate's insurance channel.
Get serious about your health
"Good health is like money in the bank," says Sjodin. "For most people, adopting a healthy lifestyle and taking care to manage any chronic conditions today can potentially lower future health care costs." This means talking to your doctor or health care professional to develop a personalized plan to become as healthy as you can. Get regular checkups, quit smoking, limit alcohol, exercise and eat right.
What if you're already retired?
It's important to comparison shop among medical providers. "It has always amazed me the care that consumers take when purchasing mundane products like tuna when compared with the level of care people take when purchasing health care. Ingredients are studied, nutritional benefits are reviewed, prices are compared, coupons redeemed, and brand names are taken into account," says Jay Starkman, CEO of Engage PEO, a human resource outsourcing organization that provides HR benefits to businesses."But very little research is done when purchasing medical services. Pricing is ignored because people have the perception that insurance is covering the bill."
Get creative. If you'll be paying cash for your medical services, you can compare prices through entities such as MediBid. The HealthcareBlueBook.com is a free consumer guide that can help you determine fair prices in your area. Some states provide average costs for procedures by hospital.
Once you know prices, don't be shy about negotiating. Often, too, if you pay cash upfront, you may get a certain percentage discount.
If you're on Medicare and have prescription drug coverage, make sure you're optimizing your coverage. Research shows that few seniors are enrolled in the Medicare drug plan with the lowest total out-of-pocket costs for their prescriptions. Shop around.
Where's a silver lining? Says Redfoot: "Our hope is that health care reform will help. Most of the initiatives have not been implemented yet. We'll see major changes in the coming years. The question is, what will be the impact?"