Last Week’s Question of the Week: Are contributions to a 529 plan tax deductible? Yes, or no?
ANSWER: No, they are not tax deductible.
HOST: Today’s topic revolves around the impact of health care costs on your retirement and how that may affect your overall retirement income pool. What do we need to keep in mind?
KLAAS FINANCIAL: One area that makes all of us the most anxious is the worry of how we will combat rising health care costs as we plan for retirement. We want to discuss one mistake that needs to be avoided: retiring without considering health insurance costs. There are many things to consider, especially if you are under 65.
- Consider your overall health: Should you retire sooner given your own family history or your current health, or your partner’s health?
- Medicare: This federal health insurance program covers those 65 years or older, certain younger people with disabilities, and people with End-Stage Renal Disease.
- Medicare eligibility age: You would become eligible for Medicare at age 65. (Do not confuse this with your full Social Security retirement age around 66/67).
The different parts of Medicare help cover specific services:
Medicare Part A (Hospital Insurance): Covers inpatient hospital stays, care in a skilled nursing facility, hospice care, and some home health care.
Medicare Part B (Medical Insurance): Covers certain doctors’ services, outpatient care, medical supplies, and preventive services.
Medicare Supplements: You should factor in anywhere from $150-$350+ per month to help with the gaps. The cost depends on the company, and your age.
Medicare Part D Remember that this prescription coverage will also have a cost.
HOST: What about COBRA? What is this exactly? Isn’t it expensive?
KLAAS FINANCIAL: COBRA can be an option for some employees who retire prior to age 65. Normally you would receive 18 months of coverage, but that could be extended for up to 36 months based on different situations, and can benefit people under age 65 who get laid off or retire.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires most group health plans that have at least 20 employees, to provide a temporary continuation of group health coverage that otherwise might be terminated. COBRA requires continuation coverage to be offered to covered employees, their spouses, their former spouses, and their dependent children when group health coverage would otherwise be lost due to certain specific events.
Employers may require individuals who elect continuation coverage to pay the full cost of the coverage, plus a 2% administrative charge. The required payment for continuation coverage is often more expensive than the amount that active employees are required to pay for group health coverage, since the employer usually pays part of the cost of employees’ coverage and all of that cost can be charged to the individuals receiving continuation coverage.
If you don’t have COBRA available you can consider taking insurance under The Affordable Care Act (ACA). The average cost of ACA health insurance for an individual between the ages of 62-65 in the United States is more than $400 per month, and can obviously be more as determined by health, deductible, income, type of coverage, age and gender. If you are talking about a couple retiring before age 65, it can easily be $800+ per month.
HOST: How much should we estimate that people will pay out of pocket in retirement for health care costs?
KLAAS FINANCIAL: We like to provide facts, or at least good estimates of averages on this show. According to HealthView Services (the nation’s leading producer of healthcare cost-projection software), the average couple retiring in 2019 in the United States at age 65 will need $390,000 to cover health care and medical costs in retirement. Keep in mind this includes Part B (doctor coverage) & Part D (prescription coverage) of Medicare, deductibles and cost sharing requirements for drugs. It also includes hearing aids and dental costs which is always a surprise to many that these are not covered by Medicare.
This is a huge number to plan for, reinforcing the fact that Medicare coverage is neither free nor completely comprehensive.
Another thing to keep in mind, the healthier you are the more money you will spend over your lifetime due to your increased life expectancy. Again, a healthy person will spend less out of pocket on a yearly basis, but more because they have additional years of expenses.
HOST: Obviously, it could cost more, or less, correct?
KLAAS FINANCIAL: Yes, of course, it’s a ballpark number. The true cost depends on a variety of factors like your health and how long you will live. There is also ongoing uncertainty about what the healthcare landscape will look like in the future. So the question is what can you do to help with these future, uncertain costs. Our suggestions:
Prior to retiring:
- Budget for health care now. Many upcoming retirees, and people getting ready to transition out of the workforce, forget to budget for health care when they estimate their expense in retirement. Why? Their employer is often picking up the majority of the tab (usually about 75%) and the remaining cost (average is about 25%) comes out of their paycheck. They think they need the same amount of take-home pay that they currently have — but they forget that they will now be responsible for paying their health care premiums in addition to the out-of-pocket costs.
- Add money into a health savings account if you are able. Maximum contribution amounts for 2020 are $3,550 for self-only and $7,100 for families. The annual “catch- up” contribution amount for individuals age 55 or older is $1,000.
Once you are retired:
- Every couple of years plan to review (shop) with a Medicare supplement specialist to make sure you are on the right plan for your supplement and also your prescription coverage as this can greatly change in cost depending on your circumstances and you may be overpaying. Maybe a Medicare Advantage Plan made sense last year but doesn’t for this next year.
HOST: Julie from our Money in Motion Listener Corner asks: “What happens to my Social Security benefit if I decide to wait till I am 70 years old before I begin to draw it out?”
KLAAS FINANCIAL: Great question and great idea! If you wait until age 70 to start your Social Security benefit, your benefit amount will be higher because you will receive delayed retirement credits for each month you delay filing for benefits which equates to 8% per year between your FRA and the age of 70. There is no additional benefit increase after you reach age 70, even if you continue to delay starting benefits.
This Week’s Question of the Week: How much will the average retiring couple at age 65 spend on health care during their lifetime? Is it $200,000 or almost $400,000?
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.