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?"
Early retirement The average retirement age is 63, according to the Center for Retirement Research at Boston College. But you can't enroll in Medicare until you're 65, so if you're looking to retire early, you've got to make sure you have health insurance, unless you're a high-stakes gambler.
Ask the easy questions first: Does your employer offer insurance benefits during retirement? Or can a still-working spouse add you to that policy?
If not, retiring at 63 may mean continuing on your former employer's plan for 18 months, the maximum allowed by Consolidated Omnibus Budget Reconciliation Act, or COBRA. You get guaranteed coverage under the group plan with none of those pesky pre-existing condition exclusions. But you have to cover the premium yourself.
A less expensive alternative is a high-deductible plan with a health savings account. But if you go that route, you need enough cash set aside "to make it work," says Alicia H. Munnell, director of the Center for Retirement Research. In your early 60s, you can expect premiums of at least $500 per month with a $2,000 to $5,000 annual deductible.
Sam Gibbs, senior vice president with eHealthInsurance.com, provides this sample premium estimate:
- A robust 55-year-old with no health issues, living in North Carolina, with a $2,000 annual deductible, could get a policy for $500 per month.
- At age 63, a policy for the same healthy person with the same deductible would cost $715 per month.
You also want to allow for annual rate increases on premiums. Historically that's been about 5 percent to 10 percent, says Gibbs.
But the problem for many early retirees isn't even the price -- often it's getting coverage at all. Before you commit to retiring early, "Make sure you qualify for individual insurance," says McClanahan. "If there are health issues, you will have trouble getting health insurance." And that could mean delaying retirement until age 63, and using COBRA until you're covered by Medicare. For help in finding the best health-insurance policy, visit InsureMe.com.
There are other options to enable you to retire before that, but your success could depend on where you live and how much income you have.
Four states -- New Hampshire, New Jersey, Maine and Massachusetts -- offer what's called "guaranteed issue" -- if you apply, they must accept you, says Gibbs. "It's more expensive, but for people with a condition, it may be their only choice," he says.
Some states have what they call high-risk pools but it's not cheap, and may limit benefits or have high deductibles, adds McClanahan. Other states either don't offer high-risk pools or aren't adding new members to the pools they have.
If you have maintained continuous coverage and exhausted COBRA, you are entitled to buy private insurance under the Health Insurance Portability and Accountability Act, or HIPAA. "But the rate can be anything," says Cheryl Matheis, vice president for health strategy with the AARP. For information on HIPAA policies and high-risk pools, check out StateHealthFacts.org.
For some, those health care bills (and rising costs in general), are forcing them to rethink plans and retire later or look at part-time employment during retirement.
"We're hearing that people are working longer because they can't afford not to work," says Matheis. "Or they're retiring and going back to work."
The benefits may be more than financial, says Munnell. "Work is good for people," she says. "It provides structure, social interaction and a sense of accomplishment. Everything tends to indicate that staying employed enhances health." Besides the increased health care costs, retiring early means smaller Social Security benefits and the opportunity to invest for several more years in a 401(k).
Long-term care insurance "One-third of people will need some type of long-term care," says Scott Leavitt, president of the National Association of Health Underwriters.
But it's not an easy decision. Coverage is not cheap and the complicated fine print often makes it advisable to get assistance from a neutral, third-party who is not selling the product.
The earlier in life you buy long-term care insurance, the lower your rate will be, but it's not cheap at any age. And for many 40-somethings, the outlay for their own long-term care takes a back seat to their kids' college funds and their own retirement accounts.
"Most people don't start thinking about it until they're in their late 50s or early 60s," says Praeger, who is also insurance commissioner for the state of Kansas. While consumers can "still get affordable policies then," the optimum time (not paying too far ahead but still locking in an affordable rate), is in the early to mid-50s, she says. "It's at least $150 a month if you purchase it at retirement," says Leavitt. "If you look at the investment, it's well worth it, even at that age."
Financial planner David Bendix, president of the Bendix Financial Group, bought his own policy in his 40s for roughly $1,000 annually. "If you wait until your 60s, the numbers are crazy," he says.
What will the policy cover? What will it allow you to do that you could not have done otherwise? Are you buying yourself a better standard of care? Or will it simply shield assets you don't have or don't need to protect? Will it cover in-home care? (Some policies bought before 2000 do not.) And is the insurance company large enough and financially stable enough to be around when and if you finally need it?
Says Matheis, "If it looks like a good deal, compared to other long-term care insurance products, it probably offers lower benefits."