When you think of retirement, you probably think of a relaxing lifestyle free from the stresses of a 40-hour workweek. Life could instead get more stressful due to rising health care costs, which is one of the most expensive post-retirement costs seniors must endure. The current generation likely doesn’t have access to a union or employer-sponsored health insurance like the previous generation, significantly increasing the individual burden. The Retiree Health Care Cost Estimate, stated that couples age 65 or older need to have $280,000 saved for healthcare costs alone. It’s wise to start planning now, so that you can create a strategy and implement it.
One smart move is to use a health savings account as long as your current life insurance retirement plan qualifies you for one. This type of account allows you to add money tax-free and take it back out tax-free for medical and healthcare expenses. Nothing compares for tax purposes. You must have a “high deductible” health plan to have an HSA. The individual plan minimum is $1,350 or $2,700 for a family plan. The most you can put in an HSA is $6,900 for a family plan or $3,450 for an individual plan. Those over 55 are allowed an additional $1,000 in contributions. These limits can change from year to year.
Another option is to wait until you turn 65 to retire instead of at 62 because retiring means losing your employer-provided insurance. Once you turn 65, you’ll be eligible for Medicare to ease expenses. The majority of retirees use Medicare for their health coverage. Medicare Part A, the portion responsible for hospital insurance, is available to most retirees at no cost as long as they paid taxes into Medicare while they worked.
Medicare Part B is for hospital care, physical and occupational therapy, doctor’s services, and home health care in some cases. The costs for Part B coverage is income-dependent and can range anywhere from $109 to a maximum of $428.60 every month.
If Medicare is your only insurance provider, expect to pay out-of-pocket costs for what they don’t cover. Their services are limited. An option many take advantage of is to purchase a Medigap or supplemental policy to pay for services Medicare won’t.
Purchasing a Medigap policy gives you more freedom when selecting doctors and services, but you’ll pay a higher premium in exchange. You will also be responsible for handling cards for both companies and coordinating policies for maximum coverage. An alternative to this is to purchase Medicare Part C, which is essentially an all-in-one plan combining Parts A and B with prescription drug coverage.
If you’re 50 or older and still working, you are allowed to make additional catch-up-contributions to a 401(k) or IRA. The limit is $6,000 per year for retirement plans offered by your employer, or $1,000 for an IRA. Don’t forget that those in this age group are also eligible to add $1,000 on top of the yearly limit to their HSA to maximize tax benefits.
Combine these different options together to create a plan that fits your lifestyle and financial expectations. Planning gives you the advantage of knowing ahead of time what you can expect Medicare to pay, and what costs you’ll be responsible for paying. You can ease the financial burden on yourself by purchasing a supplemental policy, contributing as much as possible to your 401(k) or IRA, and utilizing the tax benefits of a health savings account. Take advantage of the catch-up contribution exceptions if you’re 50 or older to make your dollars stretch as far possible.
There is a lot to think about and plan for when it comes to retirement. Contact us today to put that plan in place.