Managing Your Health Care Costs in Retirement. Plain Talk Library

Transcription

1 Managing Your Health Care Costs in Retirement Plain Talk Library

2 If you re approaching retirement or you re already retired, you probably have many questions about the financial issues the years to come will bring. How will you pay for health care? Can you count on Social Security benefits? How should you manage your retirement plans? Learn about these and other retirement topics through our Plain Talk guides. Go to

3 Health insurance and health care services represent some of the most significant costs you ll face in retirement. In fact, health care costs have risen steadily over the past several years and show no signs of abating. That s why it s important to plan ahead to ensure sufficient financial resources and adequate medical insurance coverage during your retirement years. If you lack sufficient coverage, a significant illness or chronic medical condition could wipe out much of your retirement nest egg. According to the Employee Benefit Research Institute, only about one-fourth of retirees older than 65 are covered by employer-sponsored health insurance. That means most retirees turn to Medicare, the federal health insurance program for older Americans, to cover their health care costs. But Medicare won t cover all your costs. And if you retire before age 65, you may have to purchase your own health insurance until you turn 65 and become eligible for Medicare. In this booklet, you ll learn how much health care may cost, how Medicare works, the role of Medigap, what to do if you retire early, how the new prescription drug program works, and whether you should consider long-term care insurance. Health care costs > 1

4 How much will health care cost? Health care costs have been rising at double-digit rates much faster than the overall rate of inflation in recent years, and retirees can expect to pay more than the rest of the population. In fact, Americans age 65 and over spent an average of $3,757 each in out-of-pocket health care expenses in 2003, according to estimates from the Urban Institute. The amount you ll need to save to cover health care costs depends on many factors, including: The type of insurance you have. If you have coverage through your former employer, your costs are likely to be lower than those for someone without this type of coverage. Your retirement age. If you retire before age 65, you ll have to pay for your own health insurance until you re eligible for Medicare. Your health status. Obviously, staying healthy is one of the best ways to minimize health care costs. Annual increases in insurance premiums. Health care costs are likely to continue to rise faster than inflation. A rough estimate According to estimates from the Employee Benefit Research Institute, an individual who retires at age 65 and lives to age 80 will need as much as $137,000 for health care expenses in retirement. This example assumes that health care costs rise by 7% a year, and it does not include the cost of long-term care, which is often more than $50,000 a year. If you live beyond the age of 80, you will need significantly more money to pay for health care expenses. Remember that everyone s situation is different and health care costs can vary widely, depending on where you live. If you re still working, now is a good time to check with your employer s benefits office to see what health care coverage if any your employer will provide for you in retirement. This will help you to determine how much supplemental insurance coverage you ll need to buy or how much of your medical expenses and prescription drug costs will have to come out of your own pocket. How long you live. You may need enough money to cover 30 or more years of health-related expenses. 2 > Plain Talk

5 What if you retire early? If you retire before age 65, you ll probably have to purchase your own health insurance until you become eligible for Medicare. Although this type of coverage is expensive, it s a lot cheaper than the potential cost of going without insurance. Here are some of your health insurance options if you re younger than age 65: Continue coverage under your former employer s plan. Under federal law, you and your dependents may extend your benefits for 18 months after leaving your employer. But this coverage, known as COBRA, can be expensive: You ll owe the entire premium plus up to a 2% administrative fee. Switch your coverage to your spouse s plan. If your spouse is still working, you may be able to change coverage to his or her employer s plan. This is probably the most costeffective option. Purchase private medical insurance. Such insurance can be very costly. To make the premiums affordable, you may need to accept a higher deductible. Even so, coverage could cost $400 to $500 a month, depending on your health, the policy s coverage limits, and the amount of the deductible. You may be able to find affordable group medical coverage through professional or social organizations. > Web link To calculate how much you ll need for health care expenses in retirement, use the Retiree Health Savings Calculator at Health care costs > 3

6 What Medicare covers Medicare, the nation s largest health insurance program, covers 42 million Americans age 65 and older and those with certain disabilities, according to the federal Centers for Medicare & Medicaid Research. Generally, services provided by Medicare are fee for service. This means you re free to go to any doctor, specialist, or hospital that accepts Medicare, and you must pay any costs that Medicare doesn t cover. Medicare pays for major medical expenses, such as hospital stays and doctor visits, but it does not cover routine physical examinations, dental care, routine eye care, and long-term care expenses, except for limited coverage following hospitalization. According to the Employee Benefit Research Institute, Medicare covers only about 50% of retiree health expenses. Medicare is a multipart system. Part A, which helps to pay for care in a hospital or skilled-nursing facility, is free. Part B, which covers medical services, such as doctor visits, home health care services, and laboratory tests, costs extra. And in 2006, Medicare began offering Part D, a prescription drug benefit available for an extra premium. For all parts, you re responsible for deductibles, copayments, and coinsurance payments (your share of Medicareapproved expenses), all of which may be an income tax deduction, subject to limitations. In many areas, retirees can join a Medicare managed-care plan (Part C), rather than use regular Medicare coverage. Such plans, which are part of the Medicare program, may cover some expenses that regular Medicare doesn t, and they may incorporate the drug benefit. Managed-care plans, however, limit participants to certain doctors and hospitals. How to sign up If you re eligible to receive Social Security benefits, you ll qualify for Medicare the month you turn 65. It s a good idea to sign up for Medicare about three months before your 65th birthday. (Note: If you re already receiving Social Security benefits when you turn 65, you ll automatically be enrolled in Medicare Part A.) To sign up, call the Social Security Administration at or go to the Social Security website ( When you enroll in Part A, you re automatically enrolled in Part B unless you waive coverage. Typically, Part B premiums are deducted automatically from your Social Security check. You must sign up separately for Part D. You can choose to have the Part D premium deducted from your Social Security check, or pay it directly to the private drug plan of your choice. 4 > Plain Talk

7 What is Medigap? To fill in the gaps in Medicare coverage, many retirees purchase Medigap supplemental insurance. If your only health care coverage will be Medicare Parts A and B, consider buying a Medigap policy. You can buy Medigap insurance once you reach age 65. In most states, private insurers offer Medigap policies in ten standard formats, categorized as A through J. The more coverage your Medigap policy provides, the higher the premium. If you re buying Medigap insurance, buy only one policy that offers good coverage. Some people buy several policies only to find they ve duplicated their coverage. You should apply for Medigap within six months of enrolling in Medicare Part B. During this six-month open enrollment period, you can t be rejected because of illness, an existing medical condition, or your medical claims history on earlier policies. If you sign up after this period, you may not be able to buy the policy you want, or you may have to pay a higher rate. Standard benefits Every Medigap plan includes these basic benefits: Hospitalization. Pays Part A coinsurance plus coverage for 365 additional days during your lifetime after Medicare benefits are exhausted. Medical expenses. Pays Part B coinsurance (generally 20% of Medicareapproved expenses). Additional benefits Additional benefits vary by plan. Some of the more comprehensive Medigap plans cover prescription drugs, at-home care, coinsurance for care in a skillednursing facility, and deductibles for Parts A and B. If you enroll in Medicare Part D (prescription drug benefit), you cannot have a Medigap policy with drug coverage (see Medicare prescription drug coverage on page 6). > Web link For more information about Medicare plans and Medigap policies, go to or call Health care costs > 5

8 Medicare prescription drug coverage Starting on January 1, 2006, Medicare began offering prescription drug coverage (Part D) through private companies for a monthly fee and other costs. All 42 million Americans enrolled in Medicare are eligible to choose a prescription drug plan, but you don t have to participate. If you don t sign up when you re eligible, however, you may have to pay a higher monthly fee to enroll later. How the program works Because the drug benefit is run through private companies, the plans may vary in price, coverage, and benefits. In general, all plans must meet the following basic standards: Monthly premium. You ll pay an average monthly premium of $32.20 in 2006, according to Medicare estimates. You could pay more or less, depending on where you live and the plan you choose. The premiums do not account for reimbursements from supplemental insurance or subsidies. Annual deductible. You ll pay the first $250 in drug costs each year. Co-pay. After you reach the deductible, you ll pay 25% of your prescription drug expenses up to $2,250. Coverage gap. You ll pay 100% of the costs above $2,250 until you reach $3,600 in out-of-pocket spending. Catastrophic coverage. After you reach the $3,600 limit in a calendar year, you ll pay 5% of your prescription drug costs, or a copayment of $2 for generic or preferred drugs and $5 for covered brand-name drugs, whichever is greater. What the benefit covers Part D covers brand name and generic prescription drugs offered by Medicareapproved insurance and private companies. You can t be turned down because of your income or health history. You can obtain coverage through standalone drug plans (you ll get your other medical services through your existing Medicare coverage) or through Medicare health plans that provide all your Medicare-covered services, including prescriptions. Within each type, you ll likely have numerous options. Be sure to check each plan s drug formulary (the list of drugs it covers) and the pharmacies you can go to. Generally, your enrollment period runs from the three months before you turn age 65 to the three months after your 65th birthday. After this initial eligibility period, you can enroll from November 15 through December 31 each year. 6 > Plain Talk

9 What are health savings accounts? One way to help offset the high cost of health care is to use a Health Savings Account (HSA). HSAs, which were established in 2003, allow you to put aside money for qualified medical expenses and save on taxes at the same time. Contributions to an HSA are tax-deductible; earnings and withdrawals are tax-free. Who s eligible? To be eligible to open an HSA, you must be covered under a high-deductible health plan (with a minimum annual deductible of $1,050 for self-only coverage or $2,100 for family coverage). In addition, you can t be covered by any other health plan, entitled to Medicare benefits, or claimed as a dependent on another person s tax return. In 2006, you can make the following contributions to your HSA: up to the amount of your annual deductible under a high-deductible health plan or $2,700 for self-only coverage and $5,450 for family coverage. People who are age 55 or older can make an additional $700 catch-up contribution. The catch-up contributions increase by $100 a year to a maximum of $1,000 in 2009 and thereafter. Contributions to an HSA accrue over time, so unlike other medical savings accounts you don t have to spend the entire balance in one year or risk losing it. What can HSAs be used for? Tax-free withdrawals from an HSA can be made at any time to pay qualified medical expenses (such as charges for prescription and over-the-counter medications, COBRA premiums, and long-term care services). Distributions that aren t used to pay medical expenses are taxed as gross income and will be subject to an additional 10% federal penalty tax until you reach age 65. Once you re 65 or older, the money in an HSA can be withdrawn tax-free to pay for qualified medical expenses such as Medicare premiums, but you can t use the money to pay for a Medigap policy. HSAs are most beneficial for younger investors who have more time to accumulate savings before retirement. If you re age 55 or older, it s unlikely that you ll be able to accumulate enough savings in an HSA to significantly offset your retirement health expenses. Health care costs > 7

10 Consider long-term care insurance It s not easy to think about a time when you may no longer be able to care for yourself. However, long-term care is expensive, so it s not something you can leave to chance. If you re age 65, you face at least a 40% chance of entering a nursing home at some point in your life, according to the U.S. Department of Health and Human Services. And long-term care could cost as much as $50,000 to $100,000 per year, depending on where you live. Even if you don t end up in a nursing home, having an aide come into your home three times a week to help you with dressing, bathing, and preparing meals can still cost $1,000 a month, according to America s Health Insurance Plans, a national association representing health benefits providers. Medicare generally does not cover long-term care expenses (and Medicaid generally does not kick in until most of your assets have been depleted). Depending on your financial situation and your family medical history, you may want to consider long-term care insurance to pay for the costs of a nursing home, assisted-living facility, or home health care. This insurance is generally most appropriate for retirees with moderate assets who don t have the resources to pay for a long nursing home stay, but who do have assets they wish to preserve. As with health insurance, you must keep paying the premiums each year; otherwise you lose the coverage. Longterm care insurance can be complicated and expensive, so make sure you do your homework before buying a policy. Features to consider include how much the policy pays, when the benefits begin, how long the payments last, and what types of care the policy covers. If you choose to buy a policy Generally, most people should consider buying long-term care insurance between ages 50 and 60. If you wait until after age 65, the premiums may be too expensive, or you may not pass the medical tests needed to qualify. Make sure you choose a reputable insurer that is financially sound and has a top financial rating from one of the independent rating agencies, such as A.M. Best Co., Standard & Poor s Corporation, or Moody s Investors Service. Also, show a copy of the policy to an experienced attorney or accountant before you commit. To learn more about long-term care, many resources are available. These include your insurance agent or financial advisor; your state s department of insurance; Long-Term Care Quote ( an independent agency that offers comparative data; and the American Health Care Association ( 8 > Plain Talk

11 The Centers for Medicare & Medicaid Services offer free publications to help you understand your health care options. Learn about Medicare coverage, Medigap policies, and prescription drug benefits. You can get copies online at or by calling