How To Care For Health Care Costs in Retirement

How much do you figure you'll pay for health care expenses after you retire? You're probably underestimating.

A married couple, both age 65, will fork over an estimated $275,000 over their lifetime on medical costs, according to Fidelity Investment's "2017 Retiree Health Care Cost Estimate." That includes Medicare premiums, co-payments, deductibles and out-of-pocket expenses for prescription drugs. 

However, it's likely that this same couple will pay a lot more than $275,000 because Fidelity's estimate doesn't include items such eye exams and glasses, hearing aids, dental care and long-term care. And if you retire before age 65, the number will be significantly higher.

Medical expenses represent one item in retirees' budgets that can increase significantly when transitioning from your career job into retirement. According to the U.S. Bureau of Labor Statistics, employers on average subsidize 80 percent of the cost of health care premiums for their active employees and more than two-thirds of the costs for family coverage. 

HHS Secretary Tom Price says "we believe in the guarantee of Medicare for our seniors"

But these subsidies typically go away when you retire. As a result, you'll usually end up paying for the full cost of medical insurance premiums if you retire before age 65, when you're eligible for Medicare. After that, the federal government subsidizes about three-fourths of the cost of Medicare Part B, although you'll still pay substantial deductibles and co-payments.

One erroneous conclusion that some people might make after reading about the Fidelity study's results is that they need to have the full $275,000 amount set aside when they retire, to be dedicated exclusively to future medical expenses. While that might be great if you can swing it, most people don't have that luxury, and fortunately you don't need to do that. 

You can pay for much of your medical costs with your regular retirement income, such as your Social Security benefits, employer pensions if you have one, money you make working in retirement and your withdrawals from savings.

By making smart choices with Medicare and supplemental insurance, you can turn large, unpredictable expenses into regular monthly premium payments that you can then factor into your ongoing retirement budget. Because Medicare has substantial deductibles and co-payments that can amount to thousands of dollars each year, financial advisers highly recommend that you buy supplemental medical insurance in one of two ways:

1.      Purchase a "Medigap" plan that pays for part or all of Medicare's deductibles and co-payments, combined with a separate insurance plan that covers the cost of prescription drugs under Medicare Part D.

2.     Purchase a Medicare Advantage plan (MA) that typically integrates inpatient care, outpatient care and the cost of prescription drugs, and usually covers much of Medicare's out-of-pocket costs.

You can also save for medical expenses with a Health Savings Account (HSA), in which contributions have a unique triple tax advantage:

·         They're deducted from your taxable income when they're made

·         Investment earnings aren't taxed

·         Any amounts you withdraw for qualified medical expenses aren't included in your taxable income

Because of the triple tax advantages, HSAs are like a super-IRA, and you should save as much as possible in these plans while you're working.

Qualified medical expenses that can be paid from an HSA include:

·         Medical, dental, prescription drug and vision expenses, including any deductibles and co-payments

·         Premiums paid after age 65 for Medicare or for your employer's retiree medical plan (but not for Medicare supplement plans)

·         COBRA premiums

·         Long-term care services

·         Premiums for qualified long-term care insurance

You'll also want to plan for vision and dental expenses when you retire because Medicare doesn't cover these costs. Some MA or Medigap plans might help with these costs, so you'll want to ask about that when you're shopping for these plans. Another smart tip: Take full advantage of your employer-provided medical plan's vision and dental benefits before you walk out the door of your career job.

Long-term care is the wild card in your retirement planning. A lengthy stay in an assisted living facility or nursing home can quickly drain your retirement savings, even if you have substantial savings in an HSA, 401(k) or IRA. Ideally, you want to develop a thoughtful strategy to protect yourself and your family against potentially ruinous long-term care expenses, including some combination of:

·         Buying long-term care insurance

·         Holding home equity in reserve

·         Taking out a reverse mortgage line of credit and holding it in reserve for long-term care

·         Maintaining a separate investment account for long-term care, including an HSA

·         Buying a qualified longevity annuity contract (QLAC) that starts a lifetime income at an advanced age, such as age 80 or 85.

When you consider your potential costs for health care, you might be convinced it's a smart idea to work longer, which is a very reasonable -- and wise -- reaction to these threats. Working longer can not only extend subsidized medical care coverage from your employer, but it can also allow your Social Security benefits and savings to grow as long as possible.

You have a lot to consider when it comes to your retirement planning. But if you start now, you'll be prepared when the time comes to leave the work force entirely.

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Reverse Mortgage Line of Credit Could Fund Long-Term Care

There’s a 70% chance that people over 65 will need some kind of long-term care, including services such as home care, assisted living and skilled nursing, according to government statistics.

There are lots of ways to pay for long-term care services, including Medicare, Medicaid, traditional health insurance, long-term care insurance, life insurance and annuities. Some people may have access to funding via the Older Americans Act and the Department of Veterans Affairs.

There’s an additional option worth exploring: a reverse mortgage line of credit, in which you can withdraw cash from the equity you have built up in your home.

Access to your home’s equity

Most reverse mortgages involve a lump sum for an immediate need or a string of payments over time to use a certain percentage of home equity to fund a need. Because reverse mortgages are generally used by older people whose homes are paid off or nearly paid off, long-term care is one natural use of the funds.

Since 1989, the U.S. Department of Housing and Urban Development has worked with private lenders to administer what are officially called home equity conversion mortgages, commonly called reverse mortgages. Several modifications over the years have added more features and programs to help homeowners 62 or older access a portion of their home equity.

One of the options under this program is a reverse mortgage line of credit that increases in value each year as long as the owner doesn’t use it. Here’s an example:

Let’s say you’re 65. You don’t need long-term care now, but you want the security of knowing it will be there when and if you need it. You could, for example, get a $160,000 reverse mortgage line of credit that increases in value around 4% per year no matter what the value of your $300,000 home does.

When you reach your mid-80s and your need to pay for long-term care could be reaching a high point, the line of credit amount would be about $350,000. As you use this available money, you don’t have to pay a monthly bill as you would with traditional home equity loans; the money is just subtracted from the equity in the home. The line of credit comes due either when you move out of your home or die, in which case your heirs or your estate could pay the loan back either through sale of the home or other means. Depending on how much of the line of credit has been tapped, this could result in significant debt left to heirs. If you never used the line of credit, the equity would still be in place and would pass to heirs along with the home.

Advantages over a HELOC

A reverse mortgage line of credit holds some advantages over a home equity line of credit, a similar concept in which a homeowner can borrow against the equity in the home. With a HELOC, the borrower must begin making monthly payments immediately. With a reverse mortgage line of credit, the borrower doesn’t have to make monthly payments at all.

And, as indicated above, the available funds in this type of line of credit grow over time, while HELOCs typically provide a fixed amount that the borrower can draw against and that the lender could freeze at any time to preclude further borrowing.

You can think of this type of reverse mortgage as an old-age insurance vehicle. Of course, it’s not insurance, but it’s an opportunity to have another source for funding long-term care services if Social Security, pensions and savings can’t cover the cost of care.

Several vendors are offering this program for as little as $125 in total out-of-pocket cost, which is dramatically cheaper than previous versions that included thousands of dollars in costs and fees. That means lenders are being competitive for placing this product, just like credit card companies offering 0% balance transfers.

You can find lenders in your state using the HUD website.

Having as many resources as possible to cover long-term care needs is an important part of a holistic financial plan. A reverse mortgage line of credit can ensure you’ll have funds readily available at the time of need.

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