T H E C O S T O F H E A LT H C A R EMany Americans worry that healthcare costs will consume a large portion of their resources in retirement. But it’s important to break the numbers down, and plan accordingly.

Part of a series of guides and podcasts by journalist and author Mark Miller.

Retirement Revised

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Ipsum Adipiscing

T H E C O S T O F H E A LT H C A R E I N R E T I R E M E N T

How much will you need to spend on healthcare in retirement? The lifetime estimates we often hear are daunting - but they can be misleading, since you won’t be spending these big sums all at once. And much of your healthcare spending can be managed very well - because it can be predicted and covered by health insurance. The more important questions: What are the outsize risks that could upset your retirement plan? And, what can you do to mitigate those risks?

Podcast This guide is paired with a podcast interview with Steve Vernon, a retirement educator, actuary and author of Retirement Game-Changers: Strategies for a Healthy Financially Secure, and Fulfilling Long Life. Click here to listen to the podcast, or use this link: https://bit.ly/2IrWpbq.

How much will you spend?The figures we often hear on the cost of health in retirement are so large that they bring to mind the billions and billions that the late astronomer Carl Sagan spoke of so often on television.

Fidelity Investments, for example, estimates that a 65-year old couple retiring in 2019 can expect to spend $285,000 on health care and medical expenses throughout retirement. The Employee Benefit

Research Institute found that a 65-year-old couple could need nearly $400,000 to meet lifetime expenses in a worst-case scenario.

I dislike these lump-sum estimates. They are so large that they tend to freeze people in their tracks - we don’t want to think about a challenge that seems so big, so we look away. And the big dollar estimates are misleading because you won’t be spending this money all at once - that is, you don’t need to have it all on hand at the start of retirement. These estimates measure spending for healthcare that will be spread across over 20 or more years of retirement. And to a great extent, these expenses can be managed very well - because they can be predicted - and a good chunk will be covered by health insurance. Here's another fact that renders

these average estimates meaningless: your total retirement healthcare tab will depend greatly on your own longevity and health.

A big chunk of your retirement health care spending will go to Medicare premiums - Part B (outpatient services), Part D (prescription drugs) and Medigap (supplemental coverage) for those who choose original Medicare. If you join a Medicare Advantage plan, you’ll pay Part B premiums and perhaps an additional amount for drug coverage. Additional amounts will go to Medicare's required deductibles and cost-sharing, and out-of-pocket expenses outside of the program's coverage.

Research by Vanguard and Mercer found that a 65-year-old woman using original Medicare

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and a Medigap policy (Plan F) could expect to spend $5,200 in 2018 for health care.

Medicare smooths out the cost of many health care expenses. So when considering the cost of health care in retirement, the more important questions are these: What are the outsize risks that

could upset your retirement plan? And, what can you do to mitigate those risks?

Let’s begin by considering the risks.

Healthcare inflationThe cost of healthcare continues to rise much more quickly than overall inflation.

Healthview Services, which publishes an annual report on

retirement health care costs, projects that health expenses will rise at an average annual rate of 4.22 percent, outpacing general inflation and Social Security cost-of-living adjustments.

One important proxy for health care inflation is the Medicare Part B premium; the program’s trustees

recently forecast that the monthly premium will rise in 2020 nearly 7 percent to $144.30 (in 2019, it is $135.50). Part B premiums are forecast to jump more dramatically in the years ahead, to $226.30 in 2028.

But put in context, healthcare inflation may not be as large a risk as it appears. In many cases, health care inflation will be offset by lower spending for other

goods and services. Researchers have found that discretionary spending for things like entertainment and travel fall as we age, while health care spending may rise.

Long-term careMany retirees assume Medicare will cover long-term care - but in most cases it does not.  Here, we are not talking about medical care, but assistance you might need if you become frail or disabled with everyday activities such as eating, bathing, dressing or using the toilet.

Planning for long-term care risk is tough because of the emotional issues it raises - and the difficulty getting a handle on actual risk. Rand Corp. research concludes that 56 percent of people ages 57 to 61 will spend at least one night in a nursing home during their lifetimes. People in this age group run a 10 percent risk of spending three years or more in a nursing home and a five percent chance of spending more than four years in one. The problem, of course: your risk may be low, but that won't mean much if you wind up in the unfortunately 10 percent.

Those longer nursing home stays pose major financial risks. The

Healthcare prices are projected to rise much

more quickly than general inflation.

Inflation

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median annual cost of a private nursing home room this year is just over $100,000, according to Genworth’s annual cost of care survey - it is far higher in some states. (Annual median costs of long term care are rising about 3% a year, according to Genworth; assisted living facility costs are rising more than 6% a year.)

Commercial long-term care insurance has never caught on, with perhaps 8 percent of eligible households purchasing policies. Medicare covers the full cost of care in a skilled nursing facility following a hospitalization for 20 days, and another 80 days with a substantial co-pay; Medicaid is an option for some low-income households. But the Vanguard-

Mercer researchers found that most care (72 percent) is paid out of pocket.

The authors of that study urge people to think carefully about the different types of care options that might be available, and what you might prefer. Also, consider that the cost of paid care varies widely

by the type of care used (home-based or institutional), by region and gender. Vanguard found that nearly six in ten men can expect to consume no paid long-term care, while more than half of women will need it. (Women tend to outlive men, and often wind up providing unpaid care to husbands.)

Prescription drugsMedicare Part D insurance covers most routine prescription drug costs. But there is a small but real risk of financial ruin for retirees who need very expensive specialty drugs.

The Kaiser Family Foundation (KFF) found that the risk will impact “a relatively small share of enrollees,” but those who do will face serious financial problems.

Unlike most employer-sponsored insurance, Part D does not cap the total amounts that enrollees must pay out of pocket each year. That was a minor problem when the program launched in 2003, but the advent of very expensive specialty drugs has created new math. KFF studied expected annual out-of-pocket costs for 30 specialty drugs used to treat four conditions: cancer, hepatitis C, multiple sclerosis and rheumatoid arthritis. Median out-of-pocket costs ranged from $2,622 for Zepatier (for hepatitis C) to $16,551 for Idhifa (for leukemia).

In 2019, the standard Part D benefit can have a deductible as high as $415, and 25 percent coinsurance up to an initial coverage limit of $3,820 in total out-of-pocket spending.

Medicare coverage is limited to 20 days in a

skilled nursing facility, and another 80 days

with a substantial co-pay.

Long-term care

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The next level of coverage is the so-called coverage gap, or doughnut hole. The gap was closed gradually as part of the Affordable Care Act, and it is entirely closed for brand-name drugs in 2019 - but it still features a different cost-sharing arrangement. Here, brand-name drug manufacturers must provide

a 70 percent discount on drug prices, and enrollees bear 25 percent of cost out of pocket (for generic drugs, the enrollee share is 37 percent). That coverage continues until the “catastrophic” level, which begins at $5,100 in out-of-pocket spending.

At that point, beneficiaries pay a 5 percent coinsurance rate, which

can really add up for expensive speciality drugs.

It is very difficult to protect against this risk - Part D plans all charge similar amounts for specialty tier drugs, so picking one plan over the other will not help much with the costs patients are required to pay. And, predicting a need for

one of these drugs ahead of time is impossible.

Low-income Medicare enrollees may qualify for the program’s Extra Help program, which helps pay out-of-pocket Part D costs. This program is available to enrollees with very low levels of income and assets.

Enrollees with somewhat higher income may qualify for assistance with specialty drug costs from patient assistance programs funded by pharmaceutical companies, or direct from the drug manufacturers.

Dental, vision and hearing Traditional Medicare does not cover most dental, vision or hearing care. Original Medicare will pay for dental care only in very limited circumstances - it must be deemed necessary as part of a covered procedure, for example a tooth extraction needed in preparation for radiation treatment. Some Medicare Advantage plans offer some level of coverage for all of these, but check carefully on what is included, and network provider requirements before you enroll.

The absence of all these coverage types is troubling since all are critical for good preventive healthcare. Many seniors simply pay for dental care out of pocket - the average out-of-pocket expense among Medicare enrollees who needed dental care in 2016 was $607, according to federal data. And expenses can run much higher if you need a

High-income seniors pay surcharges for

Medicare Part B and Part D - for individual

tax filers, these begin at $85,000 in

modified adjusted gross income.

Premiums

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crown, bridge or root canal, for example.

For traditional Medicare enrollees, individual commercial dental insurance offers another way to get covered. And some providers of Medigap supplemental policies offer add-on options for dental and vision care, or discount

programs to help customers save money on out-of-pocket costs.

High income surchargesMedicare premiums jump significantly for enrollees who have high income.

High-income seniors pay surcharges on premiums for both Part B and D.  The surcharges are referred to as the Income-Related

Monthly Adjustment Amount (IRMAA). They affect individual tax filers with $85,000 or more in annual income, and joint filers with income over $170,000, and scale up from there. The Social Security Administration determines who pays the IRMAA using recent tax returns. Eligibility is determined on the basis of modified adjusted

gross income (MAGI), which includes adjusted gross income and tax-exempt interest income. There is a two-year look back - in other words, whether you pay the IRMAA in 2019 is determined by the MAGI reported on your 2017 tax return. (For details on IRMAA brackets see this brief by the Kaiser Family Foundation.)

In most cases, the people who incur these surcharges are still working, since $85,000 is quite a bit of income to be receiving from Social Security, pensions or investment income in retirement. In that sense, let’s call it a “good problem to have.” But still - the surcharges can be stiff, so it’s good to know about this risk.

Strategies to considerAre you a deer frozen in the headlights yet? Please don’t be. Let’s remember, we’re talking about a planning challenge here - so let’s consider some valuable strategies for managing costs!

Watch your health: Take care of your health to keep costs down -not to mention enjoying a more satisfying retirement.

One of the nation's top experts on successful aging recommends a simple strategy: get moving.

Dr. John Rowe, Professor of Health Policy and Aging at the Mailman School of Public Health of Columbia University, suggests focusing on exercise in the years before retirement.  “It’s the only thing we really have that has shown statistically to significantly improve and maintain health as we age,” says Rowe,.

Several strategies can help you manage the

cost of a potential long-term care need.

Long-term care

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Developing a habit of regular exercise well ahead of retirement is a good predictor of whether you’ll continue that activity in retirement, he adds. “Don’t expect to start exercising when you retire - you need to be in the habit of regular physical activity before that,” he says.

How much exercise, and how often? The current federal guidelines call for a minimum of 150 minutes per week, three times a week. There’s clear evidence that people who exercise consistently have lower risk of developing diabetes, hypertension and high cholesterol.

What kind of exercise? It doesn’t matter much, Rowe says - just find something you enjoy.

Mitigate long-term care risk. Steve Vernon suggests the following strategies for mitigating the risk of high long-term care expenses.

• Consider long-term care

insurance: If the cost is too high for you, consider buying a “catastrophic-level” policy that will pay for some potential expenses - some insurance is better than none.

• Maintain a reserve of savings: these are resources dedicated to paying for long-term care

and not to be used for generating retirement income.

• Tap home equity: Your home can be used as a reserve to pay for potential long-term care costs, if selling it is an option. Reverse mortgages are another option, although this is not my favorite choice due to their cost and complexity. Reverse loans allow homeowners aged 62 years and older to generate cash by borrowing money against their home equity, with funds drawn as a fixed monthly

payment or line of credit. There is still a real risk of foreclosure or property loss. For more details, see this article.

Buy a deferred income annuity. These annuities are less expensive than immediate annuities because they start paying only if you reach an advanced age, typically 80 or 85. At that point, a deferred annuity would begin to provide income that could be used to pay long-term care costs.

Don’t over-pay for Medicare. Make sure you sign up for Medicare at the right time to avoid late enrollment penalties and lengthy coverage gaps.

Make sure you sign up for Medicare at the

right time, and reevaluate your coverage

annually.

Shopping smart

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Medicare requires enrollees to sign up during a seven-month Initial Enrollment Period (IEP) that includes the three months before, the month of, and the three months following your 65th birthday. The one exception to this is if you are actively employed at the time of your IEP, or you are on the health policy of a spouse who

is actively employed. In other cases, missing the IEP triggers late-enrollment penalties that continue for life - and possibly  expensive, long waits for coverage to start.

The most expensive late enrollment penalty is for Part B (outpatient services); it is equal to 10 percent of the standard Part B

premium for each 12 months of delay — and this is a lifetime penalty.

How much can this cost? Using the Medicare trustees’ long-range projections for the standard Part B premium in the years ahead, I calculate that someone who signed up at the beginning of

2019 and was 12 months late would pay $1,820 in penalties between now and 2027. If that same person was 24 months late, the penalties would total $3,646. And if the sign-up was three years late, the penalties would total a whopping $5,470 in 2027.

(The Part D prescription drug program also has a late sign-up

penalty, but it is far less onerous, equal to one percent of the national base beneficiary premium for each month of delay.)

The potential coverage gap stemming from late enrollment also can be a major risk. Aside from the IEP, a Special Enrollment Period (SEP) is available for eight months after other insurance ends, and coverage begins the first month after you enroll.

But late enrollees must wait for a General Enrollment Period (GEP) that runs from Jan. 1 to March 31 each year — and Medicare coverage does not begin until July 1.

Let’s say you learn at age 67 that you should have been enrolled in Medicare at age 65. You discover this in April of the year that you turn 67.

You must now wait until January through March of the following year to enroll. And at that point, coverage will not begin until July 1st. That means you’ll go for more than one year without Medicare coverage, and probably will not be able to obtain other insurance.

For more details on this, see my guide to Medicare transitions.

Working longer can boost retirement

income significantly - and that can help

offset healthcare costs.

Delay retirement

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Original or Advantage? The choice between original (fee-for-service) Medicare and Medicare Advantage (managed care) is a very big topic. Many beneficiaries like Advantage for its all-in-one features and the potential for cost-savings - many plans require no additional premium for prescription drugs, and Medigap

supplemental coverage is not used here, since Advantage plans cap out-of-pocket costs.

The Original-or-Advantage choice is too big a topic to address here, but I do want to mention one key point that can impact your health care spending in retirement.

If you expect to enroll in Original Medicare at some point in

retirement due its more flexible provider choices, you will want to add a Medigap policy to protect against the risk of high out-of-pocket costs (unless you have a supplemental policy of this type from a former employer).

The best time to buy a Medigap policy is during your six-month

Medigap Open Enrollment Period. This period begins on the first day of the month in which you’re both 65 or older and enrolled in Medicare Part B.

During Medigap Open Enrollment–also referred to as the guaranteed issue period–insurers cannot use medical underwriting to refuse to sell you a policy.

Insurers also can’t charge you more for a policy due to pre-existing conditions. Once that six-month period is over, insurers don’t have to sell a policy to you at all, and if they do, they can charge you whatever they want–hundreds, even thousands more dollars annually.

Shop your coverage. After you enroll in Medicare, It pays to re-shop your Part D or Medicare Advantage plan coverage every year, or at least every couple years, during the annual fall enrollment season that runs from October 15th through December 7th. This is the time of year when you can make money-saving changes to your Medicare coverage, and make sure your insurance coverage provides the best match of healthcare providers.

Even if you like your current coverage, it can pay to take a careful look during open enrollment. The design of your prescription drug plan coverage can change annually, and Advantage plans can make changes to their networks of healthcare providers at any time.

Start your shopping process by reviewing the Annual Notice of Change (ANOC) letter that arrives

If you have high-deductible insurance

coverage, a Health Savings Account offers

compelling tax benefits.

HSA accounts

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each autumn from your Medicare prescription drug or Advantage plan provider. The ANOC details any changes in rules for cost-sharing, coverage of specific medications - and whether a specific drug will be covered.

Shop for plans using the Medicare Plan Finder. Or, get some help

from your local State Health Insurance Assistance Program (SHIP). These are federally-funded assistance centers that provide free expert help with health insurance. Click here to find your local SHIP.

The Medicare Rights Center also offers free counseling by phone (1-800-333-4114).

Finally, there are some reputable companies that provide unbiased fee-based shopping assistance. This can be handy if you need to get this taken care of virtually, or you are helping someone out-of-state. For example, for a few hundred dollars Allsup Medicare Advisor (866-346-8872) assigns an advisor who will provide a written

personalized plan analysis and offer phone consultations.

Delayed retirement. One of my favorite approaches to managing healthcare costs is to work a bit longer and delay filing for Social Security, if possible.

A delayed filing can boost retirement income significantly - and that can help offset healthcare

costs. Social Security’s primary insurance amount rises by 8 percent for every 12 months of delay beyond your full retirement age (currently 66) until age 70–a powerful boost to income that can help fund rising healthcare costs. What’s more, the annual cost-of-living adjustment helps you keep up with inflation, albeit at a slower pace than medical inflation. (For more on this, see my guide to optimizing Social Security.)

Working longer also means more years of employer-subsidized health insurance (and fewer years of Medicare premiums and out-of-pocket costs). It also provides an opportunity to sock away additional savings in your 401(k), perhaps utilizing catch-up contribution limits.

Health Savings Accounts. HSAs are available to workers in high-deductible health insurance plans. The accounts can be used to meet current deductible and other out-of-pocket healthcare costs, but if you have the means to meet some or all of these expenses from other resources, the HSA can be a vehicle for socking away money for health care in retirement.

The tax benefits are compelling: Contributions are tax-deductible,

If you are not eligible for an HSA, a Roth IRA

offers second-best option. Roths get the

tax liability out of the way upfront, and in

most cases permit you to preserve assets

that can be used for healthcare expenses.

Roth IRAs

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investment growth and interest are tax-exempt, and withdrawals spent on qualified medical expenses are also tax-free. (Funds withdrawn for non-medical expenses are taxed at the account holder’s marginal tax rate; if before age 65, the funds are subject to an additional 20% penalty). HSAs don’t have required minimum distribution

requirements, and they are portable–they are individually owned and not tied to employers.

For 2019, qualifying health insurance plans can have a maximum out-of-pocket cost of $6,750 for individuals and $13,500 for family coverage. Some employers help offset those costs with contributions to the accounts; in 2019, combined employer-

worker contributions can be made up to a combined total of $3,500 for individuals and $7,000 for workers with family insurance coverage.

After age 65, an HSA can be used to pay a variety of qualified medical expenses, including Medicare premiums (with the

exception of Medigap premiums) or long-term care premiums. (Details can be found in IRS publication 969.

The triple tax benefit increases buying power, especially when compared with the benefit of drawing down from a 401(k), which is subject to ordinary income tax on contributions and investment gains. Benway

calculates that a worker earning $60,000 would need to save 25% less to meet medical expenses by splitting annual contributions between a 401(k) and HSA.

One cautionary note here: HSAs can accept contributions only from people enrolled in high-deductible plans — and Medicare does not meet that definition. Contributions must stop when you enroll in Medicare, although withdrawals can continue, and you’ll owe taxes on any disallowed pretax contribution that you may have made. HSA contributions must stop six months before their Medicare effective date in order to avoid tax penalties.

Roth IRA: If you are not eligible for an HSA, investing in a Roth IRA–or doing a Roth conversion–can provide a second-best saving option. Much will depend, of course, on the specifics of your tax situation. Roths get the income tax out of the way upfront, allowing tax-free withdrawal of contributions and investment returns down the road. Roths also are not subject to required minimum distributions (during the lifetime of the owner), which means you can preserve assets to meet healthcare expenses.

If you are not eligible for an HSA, a Roth IRA

offers a second-best saving option. Roths

get the tax liability out of the way upfront,

and in most cases permit you to preserve

assets that can be used for healthcare

Roth IRAs

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R E S O U R C E S

Here are a few of my favorite resources for estimating healthcare costs in

retirement, and for shopping your coverage.

HealthView Services offers several useful online tools for projecting retirement health care costs. Plug in your personal  information for a customized forecast.

Federally funded State Health Insurance Assistance Programs (SHIPS) provide free help with Medicare enrollment that can save you money. Find your local SHIP here.

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Fee-based advice. If you’re willing to pay to get advice and help with paperwork, hire an independent, fee-based counseling service such as Allsup Medicare Advisor or Goodcare.

Medicare can provide enrollment help direct over the phone at 1-800-MEDICARE. Each year, Medicare publishes “Medicare and You,” a useful, comprehensive handbook on the program. Download the guide free.

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