In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers Chapter 10 of the 2nd edition of the book titled, “Health Care.”

If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon.

Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.

Chapter 10 – Podcast Script

Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that provides a step by step plan on what to do as you transition into retirement.

This podcast covers the material in Chapter 10, on managing health care costs in retirement.

If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help.

—————

When it comes to health care costs in retirement, the media scares us with big numbers. One common statistic you see is the lump sum cost for health care for a couple age 65 and older.

For example, the Fidelity Retiree Health Care Cost Estimate is frequently quoted by the media. It says an average retired couple, age 65 in 2018, will need approximately $280,000 saved (after taxes) to cover health care expenses in retirement. This sounds scary, but it is almost the same price tag that is quoted as the average cost to raise a child. Most parents don’t have $280,000 sitting in an account when they have a baby, yet they still manage. Health care costs are similar.

Let’s look at these expenses annually instead of as a lump sum. $280,000 over 25 years is $11,200 per year, or $5,600 each. When you think of it this way, it becomes a manageable expense that you can plan for.

However, this expense does not occur evenly, like a car payment. Instead, the expenses vary depending on what phase you are in. The more you understand what to expect, and how the expenses vary, the better of you’ll be.

There are four key areas of planning for health care costs that I’ll cover in this podcast.

First, Medicare, which begins at age 65 for most people.

Second, the gap years, which occur if you retire prior to age 65 and don’t have any employer provided coverage to bridge the gap until age 65.

Third, I’ll talk about one of my favorite savings vehicles, the Health Savings Account.

And the last thing I’ll cover will be long term care costs.

Let’s start with Medicare. If you’ve worked in the U.S. long enough to qualify (which is 10 years or 40 calendar quarters of covered work), then you become eligible for Medicare at age 65. Medicare has four parts; Parts A, B, C and D.

Medicare Part A begins at age 65 and is free. Part A is the foundation of the Medicare program and is often referred to as hospital insurance.

Medicare Part B is next, and it is not free. It covers additional services, some medical supplies and some preventative services. You pay a monthly premium for Part B. The amount is announced annually.

In 2019, the basic Medicare Part B premium is $135 per month. However, this premium is means tested -so if you have a higher income, you may pay more. Those with the highest incomes pay $460 a month instead of the $135. I’ll cover this means testing in more detail in just a few minutes.

Medicare Part D refers to prescription drug coverage that you can add to your basic Medicare Part A and B benefits. As with Medicare Part B, high-income folks pay more. In 2019, the base premium is $33 a month, and the highest income households pay $77 a month.

If you add up what is covered in Parts A, B and D, you’ll find there are gaps in coverage. On average, Medicare covers about 50% of your total health care costs. Most people purchase what is called a Medigap or Medicare Supplement plan, which wraps around Original Medicare and helps cover these gaps.

A few years ago, a second option became available. This is what is sometimes called Medicare Part C or a Medicare Advantage Plan. It is private insurance that provides coverage in a single plan that includes Parts A and B, and may also include Part D. Some Medicare Advantage plans also include extra services like vision, dental, and hearing.

Currently, you must choose between either a Medicare Advantage plan or Original Medicare augmented with a Medicare Supplement policy.

You will start receiving information about Medicare six months before your 65th birthday. Most people enroll as soon as they are eligible. But what do you do if you are still working at age 65 and have insurance through your employer?

Then, it depends on the size of your employer. In general, if your employer has less than 20 employees, Medicare will become your primary insurance, even if you are still working. You will typically enroll in Parts A & B.

If you employer has over 20 employees, Medicare is often the secondary insurance. Usually you enroll in Part A, but may be able to delay Part B. And possibly delay Part D depending on the drug coverage provided.

It’s important go get this right, because if you were supposed to enroll in Medicare, but don’t do it in time, a penalty can apply. The penalty for not enrolling in Part A on time is temporary, but the penalty for not enrolling in Part B can mean you pay a higher Part B premium for the rest of your life.

We encourage people to talk to their current health insurance provider and consult with an independent agent to discuss options as they near age 65.

For those of you who with higher incomes, I am going to spend a few more minutes on the Medicare Part B and D means testing. This premium adjustment for higher income tax filers is called IRMAA or the Income Related Monthly Adjustment Amount. Medicare estimates that IRMAA results in increased premiums for about 5% of the population.

Means testing begins when your modified adjusted gross income exceeds $85,000 for single filers, or $170,000 for married filers. These limits are fixed and do not adjust up with inflation. The final premium amount is determined based on your income; the more income, the higher the premium.

Those with the highest incomes, over $500k for singles or $750k for marrieds, pay $460 a month instead of the $135 base amount.

These IRMAA premiums are determined by looking at your tax return two years prior. If you’re age 65 in 2019, they’ll be looking at your 2017 tax return. But what if your income was much higher two years ago than it is now?

We come across these situations on a regular basis. I’ll share two of them. The first is a married retired doctor and the second a single veterinarian. In both cases, they are over age 65, and their income is much lower now than it was two years ago.

We suggested each person file for a reconsideration of IRMAA. There are seven reasons you can request a lower IRMAA premium and retirement, or working less hours, is one of those seven reasons.

For our retired married doctor this may save them over $5,000 this year. For the veterinary, perhaps $1,000 - $2,000 in savings.

How do you go about paying your Part B premiums?

If you are not yet receiving Social Security, then you receive a quarterly invoice for your Part B & D premiums. Once you begin Social Security, Part B & D premiums are deducted from your monthly Social Security check.

I’ve now covered the basics on Medicare. Overall, when you go right from employer provided coverage to Medicare, the transition is not too difficult. But what about those of you who plan to retire before age 65?

You need to plan for the gap years.

The gap years occur when you retire before age 65 and have no employer sponsored health coverage. Coverage during this time period can be expensive.

Take the case of Doug and Beth as an example.

Doug worked for a construction firm and had planned on working until age 65. He was forced into retirement a few years early, at 62, when the economy took a dive. His wife, Beth, was about eight years younger, and had no plans to retire in the near future.

With a little rearranging, and through Doug’s use of extended unemployment benefits, their plan absorbed the change. To my surprise, a year later they came in to see if they might find a way for Beth to retire as soon as possible.

Beth explained that her take-home pay was only about $1,400 a month and that if she started her pension at age 55, the pension would be $1,300 per month. “What is the point of continuing to work?” she asked.

On the surface, her logic made sense, until I explained to them the cost of health insurance. Beth was paying only $54 a month for health coverage; her employer was paying the rest of the premium. Once retired, as neither she nor Doug was yet Medicare age, equivalent health insurance for the two of them would run $1,400 a month. When we factored in benefits, Beth’s job was paying her twice what she had thought.

If your employer provides health insurance, it is likely subsidizing the cost, and you may have no idea how expensive it can be if you leave the workforce.

When you leave your employer, you have COBRA coverage available for up to 18 months, so if you retire at 63 and a half, that will get you to Medicare-age. Premiums in the $700 - $1,000 per person per month range are common on COBRA, so plan for this in your budget.

If you are younger, and you’ll need to cover health care without COBRA, you’ll need to buy insura