When you’re planning for your financial future, do you think about your health? Specifically, how you will pay for healthcare after retirement, or how you will cover unexpected medical expenses? It’s not an uplifting topic, so it’s often not addressed until it’s sometimes too late and your financial plan is forced to take a detour.
Medical costs only increase as you age, accounting for a majority of spending past age 65. To put it in perspective, Fidelity estimates that a 65-year-old couple retiring in 2018 will need at least $280,000 to cover healthcare costs in retirement. And that is for a healthy couple, not including prescriptions and dental services.
Programs such as Medicare are helpful, but come with restrictions and are not a be all end all. What’s more, how you plan for and manage your healthcare coverage now can make a difference in how you enjoy what you’ve worked so hard to earn.
Medicare vs. Medicare Advantage vs. Medigap
Many people celebrate their social security or Medicare birthday – those particular ages that signal you can start reaping the benefits of aging in the U.S. (ages 62 and 65, respectively). But when it comes to Medicare, there is more than one option and education goes a long way in making sure you are sufficiently covered.
The original Medicare comes in two parts. Part A covers hospital and in-home care while part B covers doctors, procedures and equipment. If you have been working and paying taxes for at least 10 years, you qualify for part A coverage with no premium. However, you do pay for deductibles and co-insurance. Part B premiums are based on your income plus an annual deductible. Once the deductible is met, you pay 20% of costs.
Medicare alone is not enough to cover typical medical costs, let alone emergency medical costs, and many costs aren’t covered at all, such as deductibles, co-pays, co-insurance, dental and vision. And with Medicare, there is no cap to your out-of-pocket expenses, but there is a cap to what Medicare will pay on your behalf.
For this reason, it is recommended to add a supplemental healthcare plan, such as Medicare Advantage or Medigap to your financial plan.
Medigap is Medicare supplement insurance offered by private insurance companies. You pay a premium, in addition to whatever you pay for Medicare, and Medigap covers you when you see a doctor or use a facility that takes Medicare. Unlike Medicare, Medigap caps your out-of-pocket expenses.
Medicare Advantage, also known as Part C, is also offered by private insurance companies but must follow Medicare standards. Instead of paying for Medicare parts A and B directly, you pay only the part B premium directly, then enroll in a Medicare Advantage health plan and pay that premium. A Medicare Advantage plan typically covers everything that parts A and B cover, along with some extras like prescription drug coverage, dental, vision and hearing.
Medicare Advantage operates similarly to a private health insurance plan, which means coverage and costs vary. You pay a premium, then usually a co-pay for office visits or services. There is a limit on your out-of-pocket expenses.
Premiums for Medicare Advantage tend to be lower than Medigap with more services offered. However, Medigap can have a lower limit on out-of-pocket expenses.
Medigap generally provides more choices, as well, since its accepted anywhere that Medicare is accepted. Medicare Advantage can be limited by region, which may be an issue for those splitting retirement in two different areas or for avid travelers.
Adding a Health Savings Account to Your Financial Plan
No matter your age or healthcare coverage, there is a secret weapon that you should consider: a health savings account (HSA). An HSA is treated much like a retirement account, but for healthcare expenses. Money that goes into your HSA is tax-free, as is the money that you withdraw from the account to pay for approved medical expenses.
Some important HSA requirements and notes:
- You can only contribute to an HSA if you have a qualifying high deductible health plan (HDHP). In 2018, the deductible must be more than $1,350 for an individual or $2,700 for a family.
- As long as the funds are used for qualified medical expenses, the withdrawals are tax-free, otherwise there are taxes and a potential penalty.
- Just as with a retirement account, there are limits to how much you can deposit each year. In 2018, you can deposit up to $3,450 for an individual plan or $6900 for a family plan.
- If you are over age 50, you can deposit $1,000 more than the annual max.
- HSAs are not available at every bank. Research is required to find an institution that offers an HSA with the most benefits to you. Some banks charge fees and require minimum holdings, others offer interest and investment options.
It is undeniable – your financial plan must include healthcare coverage, no matter which route you take. And although the ins and outs of Medicare and supplemental coverage may seem confusing, an experienced financial advisor can help you sort out the options and the best coverage for you. He or she can also help guide you on setting up or managing an HSA account.
Stableford’s integrated advisory approach means we look at your entire financial picture, healthcare and all. To learn more about how to make healthcare part of your financial plan, contact a Stableford advisor today at 480.493.2300.