Plan ahead by including medical expenses as a line item in your retirement budget.By Susan B. Garland., From Kiplinger's Retirement Report, August 2014 Follow @susanbgarland
When you draw up a retirement-spending budget, you're likely to account for utilities, car insurance and lawn care. But have you given the cost of health care a hard look—or are the numbers too scary to contemplate?
One of the most important moves preretirees can make is to see that “their financial plan explicitly accounts for health costs in retirement,” says Sunit Patel, senior vice-president of Fidelity Benefits Consulting. On average, a couple age 65 will spend $220,000 on health care costs during retirement—and that does not include potential long-term-care costs, according to new estimates by Fidelity Investments.
When preparing a retirement budget, include a line item for health care that includes monthly premiums for Medicare Part B, a Part D prescription-drug plan and a Medigap supplemental insurance policy—plus an extra allocation for uncovered drug and other expenses. A Medicare Advantage plan could cost somewhat less. Adjust estimates for inflation, perhaps at 5% a year. If you believe you will live longer than average, plan for those additional years.
Prepare for unexpected spikes in costs, such as the $10,000 dental bill. Traditional Medicare does not cover the costs of dental or vision care, and few Advantage plans do. Nor does Medicare cover long-term care. For such expenses, be sure to set aside a large emergency reserve that you should not include when counting monthly retirement resources.
Create new income streams. Once you project your recurring monthly costs, you could buy an annuity to pay for part of those expenses. One option is a deferred fixed-payment annuity. Say you’re a 60-year-old female and you want to create a monthly guaranteed income stream of $400 to cover part of your out-of-pocket medical expenses starting at age 65, when you enroll in Medicare. You would pay $64,000 to an insurance company, according to ImmediateAnnuities.com. If you don’t need the payouts until 70, you’d pay $44,000. One downside: The payments do not rise with inflation.
Also consider delaying Social Security and allocating part of that higher benefit to Medicare premiums. Assume you’re due a $2,000 monthly benefit at full retirement age (age 66 for those born between 1943 and 1954). If you claim at 62, your lifetime benefit would be reduced to $1,500. That extra $500 a month could cover the standard Part B premium as well as average premiums for Part D and Medigap policies—totaling about $365 a month in 2014. Your Social Security benefit will rise with inflation.
You can also sock away extra money if you delay leaving your job. Fidelity estimates that a couple could save $20,000 if they postpone retirement until 67. Meanwhile, a couple who retires at 62 could spend $17,000 a year on out-of-pocket health costs until they enroll in Medicare at age 65. Those costs include premiums for individual policies the couple would need to buy once subsidized employer-sponsored coverage ends.
At age 62, you could consider a reverse mortgage, which you can set up as a line of credit or monthly income stream. You or your heirs must pay back the loan, with interest, when you die, sell the house or move out for more than 12 months.
Avoid the surcharge. Medicare beneficiaries pay higher Part B premiums if their annual modified adjusted gross income exceeds $85,000 for singles or $170,000 for couples. Over an average life span, an individual in Massachusetts who is 55 today could expect to pay $216,492 on Part B and Part D premiums on income lower than $85,000 a year, according to HealthView Services, a company that helps financial advisers estimate clients' lifetime health costs. If AGI exceeds the top surcharge threshold of $214,000, the beneficiary could pay $666,932. (There are five income thresholds, with surcharges increasing at each one.) The standard Part B premium is $104.90 in 2014.
Preretirees and current beneficiaries can lower or reduce future surcharges by keeping AGI from reaching into a higher threshold, says Ron Mastrogiovanni, HealthView’s president and chief executive officer. Since Roth IRA income does not count toward AGI, Mastrogiovanni notes that conversions before or early in retirement “could save hundreds of thousands of dollars” in income-related Medicare premiums. He also points out that qualified withdrawals from a health savings account do not count toward AGI.
Tap life insurance. With most permanent life insurance policies, you can take tax-free withdrawals or loans from the accumulated cash value to pay for health care and other expenses. (These don't count toward AGI, either.) However, if you take a withdrawal or don't pay back the loan, you reduce the death benefit for heirs.
Several companies are offering new life insurance features aimed at retirees who may face big health care expenses. Earlier this year, New York Life introduced a "chronic care rider" that buyers can add to whole-life policies at a cost of 4% to 5% of the premium. The rider enables a policyholder to get accelerated death benefits if he or she becomes cognitively impaired or needs help with two out of six activities of daily living, such as dressing or bathing.
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