Healthcare is a key financial planning item in retirement and one of the many areas that changes dramatically compared to your working years. Specifically, there are two key healthcare planning windows to consider in retirement: 1) prior to Medicare eligibility at age 65 (assuming you retire before then), and 2) from 65-onward once you become eligible for Medicare. In this episode, we discuss these two windows and share practical tips and strategies for what to consider and how to go about making the important decisions that have to be made in each phase. By being smart with how you approach healthcare planning in retirement, you can make sure you have the right coverage for your situation while not paying more than what’s necessary for it.
Outline of this episode
- The time between retirement and Medicare eligibility [3:29]
- Private health insurance and the Affordable Care Act [6:14]
- Becoming eligible for Medicare: A basic review [10:58]
- What Medicare doesn’t cover [12:11]
- Decisions you have to make [13:23]
- Paying for Medicare and some planning opportunities [14:41]
- The recap [18:07]
Healthcare options when retiring before 65
For anyone who is planning to retire prior to age 65, the biggest surprise is often just how expensive private health insurance can be. If you plan to retire at 50 or 55, paying for private health insurance for 10 to 15 years can have a material impact on your overall spending in retirement. Albeit a temporary cost, since when you reach Medicare age the cost of health insurance drops dramatically. The first thing to understand is what your options are.
You may have the option to use your spouse's health plan; if not, you’re only left with two options. One, keep your old employer's health insurance, or two, buy your own private health insurance.
Beginning with one, there are some employers that allow employees to keep their employer-provided health insurance so it’s a good starting point to check with your employer and see if they have any retiree health benefits.
The other option for keeping your employer's health insurance is through COBRA. It's expensive and is only an option for a limited time, which in most cases is 18 months. This really only leaves you with the one option of buying your own private health insurance.
Private plans and saving with the Affordable Care Act when possible
Generally speaking, private health insurance can be quite expensive. The exact cost will depend on things like your age and the type of plan you choose. But as mentioned, it can be as high as $20,000 annually per couple for the insurance premiums alone.
One possible way to save money on your health insurance premiums is with the Affordable Care Act. When the Affordable Care Act was passed it created an insurance marketplace where you can shop for and purchase your own private health insurance policy from a list of options. One benefit of this is that if you buy your health insurance through the marketplace you could be eligible for a subsidy based on your income. The government essentially covers part of the cost of your health insurance premiums.
One thing to note is the health insurance subsidy was intended to make health insurance more affordable for those with lower incomes so it would almost never be an option for a physician during their working years, even if they're responsible for paying for private health insurance. However, qualifying for the subsidy has nothing to do with your net worth and everything to do with your tax return. So you could have $10 million of investments, but if your tax return says your taxable income is within a certain range, you can qualify for a subsidy. This is where planning to meet your unique situation becomes important and can potentially save you thousands of dollars.
A basic review of Medicare
Medicare is the government-subsidized health insurance for retirees. The idea is that during your working years you pay taxes to the government that goes toward Medicare, then when you retire you're able to collect the benefit of those taxes by receiving Medicare and paying a smaller monthly premium for coverage.
There are three different parts to Medicare.
1) Part A: covers inpatient services, paid for and provided by the government
2) Part B: covers outpatient services, paid for by you, provided by the government
3) Part D: covers prescription drugs, optional, paid for by you or government depending on income, provided by private health providers, penalty if you don't sign up initially and add it later
So you have these three parts and they work together when it comes to providing your health insurance coverage. However, while the three parts combined cover around 80% of your potential healthcare costs, a gap remains, which means you may not know what your total out-of-pocket health insurance costs could be in any given year. This is where a supplemental policy comes into play to cover the remaining 20% of potential healthcare costs. A supplemental policy, which is often referred to as a Medigap, works in addition to Medicare and helps cover the portion of the healthcare costs that Medicare doesn't. Medicare doesn't cover certain expenses for things like hearing aids, eyeglasses, and dental care so you want to make sure that you either have insurance or are comfortable paying out of pocket for those things.
Resources & People Mentioned
- Download our guide: Retirement Checklist – A Guide to Planning for Retirement
- Download our guide: Retirement Timeline – Key Dates & Opportunities
- Download our guide: How to Create a “Paycheck” in Retirement