Planning for Healthcare in Retirement

by Charissa Anderson, CFP®
Senior Vice President

Our health and well-being during this pandemic is a top priority. While there are things about managing our healthcare that we cannot control, we do have options to plan for the financial impact.

Establishing a Health Savings Account, ensuring you have the right Medicare plan and evaluating long-term care insurance are just a few of the many steps you might consider. Perhaps you will have time to read on and learn more about these strategies as you practice your social distancing. As always, our portfolio managers are available to help clients navigate financial decisions and life events.

Rising healthcare costs continue to be a top concern in retirement. With longer life expectancies and healthcare inflation that continues to outpace general inflation, healthcare remains one of the largest expenses for retirees.

Unfortunately, Medicare does not cover all healthcare costs. A recent Employee Benefits Research Institute study noted that Medicare generally covers only about 62 percent of the cost of healthcare services for Medicare beneficiaries ages 65 and older (1) and, over time, premiums and out-of-pocket costs will go up. The good news is there are ways to financially prepare.

Health Savings Accounts

If you are still working and your employer offers a high-deductible plan, consider contributing to a health savings account (HSA). An HSA is a type of savings account that lets you set aside money on a pretax basis to pay for healthcare expenses. Funds in an HSA grow tax-deferred and come out Federal and state tax-free (2) when used for qualified medical expenses. Qualified medical expenses include costs such as Medicare Part B and D premiums, vision and dental care expenses and qualified long-term care insurance premiums up to certain limits.

For 2020, an individual can contribute $3,550 a year and a family can contribute $7,100. Those over 55 years old can make a catch-up contribution of an additional $1,000.

If you withdraw money from an HSA for nonqualified medical expenses, you will be subject to income tax plus a 20-percent penalty on the amount withdrawn. Once you turn age 65, you may choose to use your HSA for nonmedical expenses and it will function similarly to a traditional IRA. You can use your HSA for any expense without incurring a penalty, you simply pay income tax on the withdrawals.

To make the most of an HSA, invest the contributions for the long term and pay for current healthcare costs out of income or short-term savings.

An HSA is a great vehicle for healthcare savings during your lifetime, but it is important to pay attention to the named beneficiary on the account. If your spouse is the beneficiary, he or she will inherit the balance tax-free and may continue using the HSA as their own. If a nonspouse is named, the funds will be distributed and taxed as income to the beneficiary based on the fair market value in the year of the account owner’s death. There is an exception for qualified medical expenses of the account holder paid within a year of death. If an estate is the beneficiary, the HSA will be distributed to the estate and taxed as income on the account holder’s final income tax return.

Navigating Medicare

Navigating the numerous features of Medicare Parts A, B and D as well as Medicare Advantage and Medigap plans can be overwhelming. Fortunately, you do not have to do it alone.  Medicare licensed insurance agents can work with you to compare Medicare plans, highlighting the advantages and disadvantages of each plan so you can make an informed decision. Better yet, there are no additional costs associated with working with these licensed agents than if you went straight to the insurance carrier.

A great place to start your search for state-specific Medicare guidance is navigating to the State Health Insurance Assistance Programs network site and selecting your state. For example, Oregon residents will be directed to Senior Health Insurance Benefits Assistance (SHIBA). Oregon SHIBA has paid employees and volunteers who help educate individuals on their Medicare options. SHIBA representatives are not licensed to sell Medicare plans, but they do provide a directory of agents who do.  In your search, look for licensed agents that are certified with many carriers and specialize in Medicare plans.

Once you’re enrolled in Medicare, remember that over time, plans change and needs change too. It is important to reevaluate your options during open enrollment, which occurs from October 15 to December  7 each year.

Long-Term-Care Planning

In addition to planning for your ongoing healthcare expenses, it’s important to consider the possibility you will need some form of long-term care. Long-term care arises when someone requires assistance completing daily activities for an extended period of time. One in 10 men and nearly two in 10 women are projected to have a significant care need for more than five years (3).

The best time to plan for long-term care is before you need it. Proactive planning provides you time to understand your options and make decisions while you are still able to.

Generally, there are two approaches in long-term care planning. You can insure your potential costs with a long-term care policy, or self-fund by saving and investing enough to pay for the costs yourself. There are advantages and disadvantages to both options and your decision will depend on a number of factors including the type of care you want, who will be available to help care for you, costs in your area, what type of insurance policies are available to you and your financial resources.

Below are a few pros and cons to both options:

Long-Term-Care Insurance:

  • Pro: By transferring the risk to an insurance company, you have peace of mind knowing you have a benefit if you need it

  • Con: Premiums can be expensive and may increase over time.

  • Pro: Long-term care insurance benefits are generally received tax free and premiums may be tax deductible, subject to certain limitations 

  • Con: There is a chance you never use it.

Self-Funding

  • Pro: You have the flexibility to spend the money how and when you want.

  • Con: You assume the risk the money set aside will grow and be there when you need it.

  • Pro: If you never have a long-term-care event, the funds can be used for other expenses.

  • Con: If you suffer a prolonged long-term care need, the expense may deplete all your assets and leave you with limited choices.

If you decide a long-term-care insurance policy is the right choice for you, it’s a good idea to start exploring your options in your 50s or early 60s before premiums become cost prohibitive or your health deteriorates, and you no longer qualify for coverage. Long-term-care insurance may be attractive for couples who are concerned that the resources to provide for the care of one ill partner could strain the resources and quality of life for their healthy partner. Ask your agent about newer “hybrid” policies that offer a death benefit to your heirs and lock your premium in upfront.

Whether you purchase a long-term-care insurance policy or decide to self-fund, the most important factor is that you have a plan in place.

If you would like to take a deeper look into how healthcare planning affects your overall financial picture, reaching out to your portfolio manager can be a good first step.

(1) California and New Jersey Tax HSA contributions

(2) Employee Benefit Research Institute, December 2017, Vol. 38, No.10

(3) J.P. Morgan Asset Management

Disclosures