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Budget big on health care costs

By Jennie L. Phipps · Bankrate.com
Thursday, June 12, 2014
Posted: 4 pm ET

Holding the lid on health care costs is another good reason to delay retirement, says Fidelity Investments, which today released its annual estimate of the health care tab couples can expect to incur during their retirement years.

Fidelity calculates that a couple retiring at age 65 will rack up an average $220,000 in costs for health care over the remainder of their lives, not counting the cost of long-term care. The number is the same as last year, an encouraging retirement planning detail that Fidelity attributes largely to cost controls that were part of the Affordable Care Act, passed in 2010.

Fidelity also calculated that if a couple retires early at age 62, they are likely to spend $17,000 a year more for the three years prior to the time Medicare kicks in due to out-of-pocket costs and the need to pay insurance premiums that would otherwise be covered by employer-sponsored health insurance. But if a couple with employer health insurance works until age 67, Fidelity estimates they'll spend $10,000 less a year between ages 65 and 67.

Do an assessment before retirement

Anyone approaching retirement needs to look hard at what their insurance and Medicare premiums will be, says Sunit Patel, senior vice president for Fidelity Benefits Consulting, because, "A lot of people just don't understand what it is going to cost them."

Patel suggests you start by figuring out whether you will get some sort of post-retirement health care benefit. Increasing numbers of employers are planning to eliminate these or already have done so -- at least for some employees. "A lot of companies have capped their subsidies. They are saying something like, 'We’ll keep paying 50 percent of the cost of this plan, but under no circumstances will we pay more than $2,000.' The guy sitting next to you may be getting a different deal. You have to figure it out," Patel says.

Calculating Medicare costs is also key. If you get a windfall -- a large taxable bonus or other money when you leave your employer at or near age 65 -- you may have a year or two or more when you face punishing surtaxes, as well as additional Medicare premiums. Medicare calculates these by looking at your prior year's income, and one or two big years can send these costs into the stratosphere -- at least in the short term. (The table at bottom shows standard Part B premium costs for 2014.)

Fidelity's estimate of retirement health care costs reflects standard Medicare, "Because we believe future funding for Medicare Advantage plans is uncertain," Patel says. But he agrees that doesn't mean people shouldn't sign up for Medicare Advantage plans while they are available and often cheaper than the standard alternative.

Even after you've picked a Medicare plan, Patel thinks there may be some surprises. "A lot of people think Medicare covers all expenses, but Medicare covers lots less than most employer plans do," he says.

So the bottom line is: Budget high and then be prepared to pay more than you originally estimated.

Monthly Medicare premiums for 2014

The standard Part B premium for 2014 is $104.90. If you are single and filed an individual tax return, or married and filed a joint tax return, the following chart applies to you:

Modified Adjusted Gross Income (MAGI) Part B monthly premium amount Prescription drug coverage monthly premium amount

Modified Adjusted Gross Income (MAGI): Individuals with a MAGI
of $85,000 or less

Married couples with a
MAGI of $170,000 or less

Part B monthly premium amount: 2014 standard premium = $104.90 Prescription drug coverage monthly premium amount: Your plan premium

Modified Adjusted Gross Income (MAGI): Individuals with a MAGI
above $85,000 up to $107,000

Married couples with a MAGI
above $170,000 up to $214,000

Part B monthly premium amount: Standard premium + $42.00 Prescription drug coverage monthly premium amount: Your plan premium + $12.10

Modified Adjusted Gross Income (MAGI): Individuals with a MAGI above
$107,000 up to $160,000

Married couples with a MAGI
above $214,000 up to $320,000

Part B monthly premium amount: Standard premium + $104.90 Prescription drug coverage monthly premium amount: Your plan premium + $31.10

Modified Adjusted Gross Income (MAGI): Individuals with a MAGI above
$160,000 up to $214,000

Married couples with a MAGI
above $320,000 up to $428,000

Part B monthly premium amount: Standard premium + $167.80 Prescription drug coverage monthly premium amount: Your plan premium + $50.20

Modified Adjusted Gross Income (MAGI): Individuals with a MAGI
above $214,000

Married couples with a
MAGI above $428,000

Part B monthly premium amount: Standard premium + $230.80 Prescription drug coverage monthly premium amount: Your plan premium + $69.30

Source: Social Security Administration

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