Planning For Your Healthcare Costs, To and Through Retirement

Podcast listener Corey wrote in and said…

I’ve gotten very serious about personal finance recently and have consumed a large amount of personal finance content over the last 18 months.

Something I’ve noticed to be lacking is how to plan and account for healthcare costs during all phases of your retirement planning.

I think most people would agree that it represents a huge aspect of an individual’s or family’s financial picture and I think the argument could be made that, on average, it is a poorly understood topic by the general public.

I think Corey makes a great point, and I’m happy to admit I fall in that camp. I know my fair share about portfolio this and account type that. Saving on taxes, when to claim Social Security. I’ve got my facts down.

When it comes to Medicare, IRMAA, some of those ideas, I can poke my way around. But Corey’s question caused me to dig deeper into this question than I ever had before. 

Now that I’ve dug and dug and dug, here are the 4 stages of healthcare during all phases of your retirement planning. 

Healthcare Costs While Working

Most American employees have an employer-sponsored group plan.

It might be worth defining some terms here, like premiums, deductibles, copays, and out-of-pocket maximums. 

Think of premiums as your monthly membership fee for having health insurance. You pay your premium every month, whether or not you go to the doctor. It’s the cost of staying in the club, so your insurance is active and ready when you need it.

Your deductible is the amount you must pay out of pocket each year before your insurance coverage kicks in. Example: If you have a $2,000 deductible, you pay the first $2,000 of your medical bills yourself. After that, your insurance starts chipping in.

A co-pay is a fixed amount you pay when you receive certain services. For example, you might pay $30 every time you visit your primary care doctor, or $10 for a prescription. Co-pays usually kick in even before you’ve met your deductible.

The out-of-pocket maximum is the the most you’ll have to spend in a year on covered health care. It’s your “ceiling.” Once you hit this number, insurance pays 100% of covered expenses for the rest of the year.It includes what you pay toward deductibles, co-pays, and co-insurance (if your plan has that too).

Some healthcare plans allow you to open a Health Savings Account, or HSA. If you haven’t heard of it, it’s a fantastic account with a so-called “triple tax advantage.” You get to invest tax-deferred on the front end. You can invest your money in an HSA, and it’ll grow tax-free. And then when you spend on healthcare costs, your withdrawals are tax-free too. 

For Sudden Changes in Employment: COBRA’s Stopgap

If you’re leaving your job for any reason, including to retire early, it might be worth diving into COBRA coverage. COBRA stands for the Consolidated Omnibus Budget Reconciliation Act.

It’s a federal law that gives you the right to keep your employer-sponsored health insurance for a limited time after you lose your job or experience another qualifying life event. You can use COBRA if you lose your health insurance because of:

• Quitting or being laid off (unless it’s for gross misconduct)
• Reducing your work hours
• Divorce or legal separation
• Death of the employee (coverage for dependents)

COBRA coverage can extend for:

• 18 months if you lost your job or had your hours reduced
• 36 months for other events like divorce or death

There are some extensions, but 18 and 36 months are the basics.

But COBRA is expensive.

When you’re employed, your employer often pays a big chunk of your monthly premium.
With COBRA, you pay the full premium yourself, plus up to a 2% administrative fee.

If your employer was paying $1,000/month and you were only paying $200 per month, under COBRA you’d now pay the whole $1200 per month.

So why would anyone use COBRA?

Because you get to keep your exact same plan. Same doctors. Same deductibles. Same out-of-pocket progress. For people with ongoing medical needs, that continuity can be huge.

The ACA for Planned Early Retirement

What if you reach financial independence and want to retire at age 45 or 50…or even the more normal retirement ages of 59 or 62. You won’t have a work-sponsored plan, but you’ll have decades still before age 65 when Medicare kicks in. 

The answer is to go shopping on the ACA exchanges – that’s the Affordable Care Act. ACA provides healthcare for all. Your ACA costs, or premiums, will be based on the following: 

• Your age (younger is better than older, as to be expected with health insurance) 
• Where you live, due to local medical costs, competition among insurers,
• Tobacco use – again, understandably so 
• Household size and income – this is a huge one, especially from a financial planning point of view.

There’s something called the “premium subsidy,” also called the “ACA tax credit”. The lower your income, the more help you get paying your premiums.

So – you want to minimize your income to maximize your ACA benefit, right?!

This goes back to the “puzzle piece” or “spider web” analogy of financial planning. All these different concepts fit together and interact, compounding in beneficial or detrimental ways. To access affordable or free healthcare in early retirement, keep your income low. You won’t be working, so that’s easy.

But you might want to execute Roth conversions, or capital gains planning in the 0% gains bracket, or 72t / “substantially equal periodic payments” from your Traditional accounts.

The problem is that all of those smart things you can do will negatively affect your ACA credits. How do you optimize that problem? That’s a fun question – at least I think so – that I get to answer for my clients.

There’s a second interesting conversation here. I call it “benefits hacking.”

A lot of public benefits are based on income or net worth, or both. ACA benefits are based on income. Someone could retire early with millions of dollars in net worth, but almost no income, and they can get free healthcare. Is that genius? Or immoral? Do we hate the player or hate the game?

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What About the “Gap to Medicare?”

Next, let’s talk about healthcare costs in the gap to Medicare. I’m thinking about the 58-year-old or 62-year-old “normal” retiree. 

The answer here is still the ACA.

But it’s important to realize that ACA premiums do rise sharply with age. The costs can exceed $1000 per month per person without subsidies. And ACA subsidies change annually, both because your age is changing, but also due to refinements in the ACA cost structure itself. 

If you’re worried about how to plan for your ACA costs, look no further. There are some great calculators out there, like on the healthcare.gov website or at KFF.org, which is an independent health policy think tank.

For example, I recently ran a simple test in the KFF calculator, focusing on:

• someone in New York state
• who retired early at age 50
• and realized $80,000 in income using some of the financial planning tactics I mentioned earlier
• they have a family of 4, but only the parents will be on this plan
• the kids will be on the NY Child Plus plan (if you’re a NY resident and not aware of NY Child Plus, it’s definitely worth checking out. And if you’re not in NY, you might want to see if your state has a similar program)

…anyway, this family will have 80% of their monthly costs covered by their premium tax credit, leaving a monthly cost of $284 for them. I don’t know about you, but that number is surprisingly low to me. 

But, if your income is *too* low, you’ll qualify for Medicaid instead of the ACA. While Medicaid is free, there are some downsides. Mainly, Medicaid providers can be limited in some areas, with timely access being a big issue. Most people in the financial independence community are bigger proponents of low-premium ACA plans than of free Medicaid plans. 

Age 65+ With Medicare Kicking In

All Americans get access to Medicare starting at age 65.

There are many parts of Medicare. Part A covers hospital care, skilled nursing, hospice, and some home health. Most people get Part A for free if they or a spouse paid Medicare taxes for at least 10 years. 

Part B is medical insurance, and this is the big part that most people are aware of. It covers doctors’ visits, outpatient care, and preventive services. Part B has a premium, which ends up around $180 per month. Though that premium is subject to something called IRMAA. IRMAA, to be blunt, is an extra Part B tax that high earners must pay. IRMAA can increase the monthly payment from $180 per month to as much as $600 per month. 

Part C is called Medicare Advantage. These are private insurance plans meant to replace original medicare parts A and B, and often include added benefits like dental, vision, prescriptions, fitness perks, etc. You still pay your Part B premium here, but get all your services through a private plan. 

Part D is prescription drug coverage, usually costing $30 to $50 per month. 

You need to enroll in Medicare. Your window to do so starts 3 months before you turn 65. And you MUST enroll. Late enrollment leads to lifetime penalties for Part B and Part D. 

There’s also something called MediGap. It’s a supplemental private policy designed to fill gaps in Medicare coverage, including coinsurance charges, expanded provider access for travelers (such as snowbirds), and other ancillary benefits. 

Some retirees opt to get Part A for free, Part B for their premium + IRMAA, a MediGap plan to cover coinsurance and deductibles, and Part D for prescriptions. 

Others opt for the Medicare Advantage Plan – which is Part C – because that includes Part A, Part B, and usually Part D.

The median retiree spends about $5000 per year on healthcare, which includes both the Medicare premiums and any out-of-pocket costs. 

What About Nursing Homes, etc?

I think there’s one more retiree topic worth covering: the question of nursing homes, extended care, or other options that we’ve all probably heard can be very expensive. The generic term here is “long-term care,” or LTC. 

Long-term care refers to non-medical help with “activities of daily living,” like bathing, dressing, toileting, transferring in and out of bed or a chair, eating, and continence.

When someone needs help with two or more of these activities of daily living, they’re typically eligible for long-term care services. There are four broad categories of long-term care.

Home Care are services brought to the individual’s home: personal aides, visiting nurses, physical therapy, etc. It’s the most flexible and least disruptive LTC service. It’s not typically covered by Medicare unless it’s short-term and medically necessary (e.g., post-hospital rehab).

Assisted Living Facilities (ALFs) help with activities of daily living in a residential setting. The residents still maintain independence and there’s no around-the-clock nursing. ALFs are not covered by Medicare.

Memory Care is specialized assisted living for individuals with dementia or Alzheimer’s. It carries a much higher cost due to the need for supervision and safety.

Last are Nursing Homes (or Skilled Nursing Facilities), which provide 24/7 care, including medical supervision. These facilities help individuals with serious health needs or a total loss of independence. Medicare pays only short-term stays: up to 100 days, if qualified. After that, you pay out of pocket or rely on Medicaid.

Stay Healthy!

So, Corey and any other folks with similar questions, there’s certainly a lot to learn when it comes to how we’re going to pay for healthcare throughout our lives. 

But – the information is certainly out there! Especially when it comes to how these medical costs might impact our cash flow planning and our overall financial plan.

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