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Mark Miller: Remaking Retirement

Retirement Healthcare Costs: Strategies for Meeting the Challenge

Healthcare spending poses risks to your retirement plan. Contributor Mark Miller shares strategies for controlling costs and building resources.

In my last column, we looked at four key elements of healthcare spending risk in retirement--and I hope that rundown didn’t leave you feeling like a deer caught in the headlights. It shouldn’t, because solid strategies are available to help mitigate the risks.

Let’s consider a short list of approaches to controlling costs and building resources to help meet the cost of healthcare in retirement.

Medicare: Don’t Overpay
Make sure you sign up for Medicare at the right time to avoid late enrollment penalties and lengthy coverage gaps.

Medicare requires enrollees to sign up during a seven-month Initial Enrollment Period that includes the three months before, the month of, and the three months following your 65th birthday. The one exception to this is if you are actively employed at the time of your IEP, or if you are on the health policy of a spouse who is actively employed. In other cases, missing the IEP triggers late-enrollment penalties that continue for life--and possibly mean expensive, long waits for coverage to start. Learn more about this in my recent column on Medicare transitions.

Original or Advantage?
The choice between original (fee-for-service) Medicare and Medicare Advantage (managed care) is a very big topic. Many beneficiaries like Medicare Advantage for its all-in-one features and the potential for cost-savings--many plans require no additional premium for prescription drugs, and Medigap supplemental coverage is not necessary here, since Medicare Advantage plans cap out-of-pocket costs.

There are downsides to Medicare Advantage, too. The big one is a narrower choice of providers. So, approach this decision with care. But one key part of this decision can have a significant impact your healthcare spending in retirement.

If you expect to enroll in original Medicare at some point in retirement due its more-flexible provider choices, you will want to add a Medigap policy to protect against the risk of high out-of-pocket costs (unless you have a supplemental policy of this type from a former employer).

The best time to buy a Medigap policy is during your six-month Medigap Open Enrollment Period. This period begins on the first day of the month in which you’re both 65 or older and enrolled in Medicare Part B.

During Medigap Open Enrollment--also referred to as the “guaranteed issue period”--insurers cannot use medical underwriting to refuse to sell you a policy. Insurers also can’t charge you more for a policy due to pre-existing conditions. Once that six-month period is over, insurers don’t have to sell a policy to you at all, and if they do, they can charge you whatever they want--perhaps hundreds, or even thousands, more dollars annually.

Shop Your Coverage
After you enroll in Medicare, it pays to re-shop your Part D or Medicare Advantage plan coverage every year, or at least every couple of years, during the annual fall enrollment season that runs from Oct. 15 through Dec. 7. This is the time of year when you can make money-saving changes to your Medicare coverage, and make sure your insurance coverage provides the best match of healthcare providers.

Even if you like your current coverage, it can pay to take a careful look during open enrollment. The design of your prescription drug plan coverage can change annually, and Medicare Advantage plans can make changes to their networks of healthcare providers at any time. Learn more about this in my interview with Morningstar’s Christine Benz, and my Medicare shopping checklist.

Mitigate Long-Term Care Risk
Steve Vernon, author of Retirement Game-Changers: Strategies for a Healthy Financially Secure, and Fulfilling Long Life, suggests the following strategies for mitigating the risk of high long-term care expenses.

  • Consider long-term care insurance: If the cost is too high for you, consider buying a “catastrophic-level” policy that will pay for some potential expenses--some insurance is better than none.
  • Maintain a reserve of savings: These are resources dedicated to paying for long-term care and not to be used for generating retirement income.
  • Tap home equity: Your home can be used as a reserve to pay for potential long-term care costs, if selling it is an option. Reverse mortgages are another option, although this is not my favorite choice due to their cost and complexity. Reverse loans allow homeowners aged 62 years and older to generate cash by borrowing money against their home equity, with funds drawn as a fixed monthly payment or line of credit. There is still a real risk of foreclosure or property loss.

Buy a Deferred Income Annuity
These annuities are less expensive than immediate annuities because they start paying only if you reach an advanced age, typically 80 or 85. At that point, a deferred annuity would begin to provide income that could be used to pay long-term care costs.

Delay Retirement
One of my favorite approaches to managing healthcare costs is to work a bit longer and delay filing for Social Security.

A delayed filing can boost retirement income significantly--and that can help offset healthcare costs. Social Security’s primary insurance amount rises by 8% for every 12 months of delay beyond your full retirement age (currently 66) until age 70--a powerful boost to income that can help fund rising healthcare costs. What’s more, the annual cost-of-living adjustment helps you keep up with inflation, albeit at a slower pace than medical inflation.

Working longer also means more years of employer-subsidized health insurance (and fewer years of Medicare premiums and out-of-pocket costs). It also provides an opportunity to sock away additional savings in your 401(k), perhaps utilizing catch-up contribution limits.

Health Savings Accounts
Health savings accounts are available to workers in high-deductible health insurance plans. The accounts can be used to meet current deductible and other out-of-pocket healthcare costs, but if you have the means to meet some or all of these expenses from other resources, the HSA can be a vehicle for socking away money for healthcare in retirement.

The tax benefits are compelling: Contributions are tax-deductible, investment growth and interest are tax-exempt, and withdrawals spent on qualified medical expenses are also tax-free. (Funds withdrawn for non-medical expenses are taxed at the account holder’s marginal tax rate; if before age 65, the funds are subject to an additional 20% penalty). Health savings accounts don’t have required minimum distribution requirements, and they are portable--they are individually owned and not tied to employers. Learn more in Morningstar’s guide to HSAs.

Roth IRAs
If you are not eligible for an HSA, investing in a Roth IRA--or doing a Roth conversion--can provide a second-best saving option. Much will depend, of course, on the specifics of your tax situation. Roths get the income tax out of the way upfront, allowing tax-free withdrawal of contributions and investment returns down the road. Roths also are not subject to required minimum distributions (during the lifetime of the owner), which means you can preserve assets to meet healthcare expenses.

Improve Your Health!
This last suggestion isn’t financial--but it could have a far larger impact on your retirement healthcare tab than any of the others listed in this column. Simply put: Take steps to improve your health.

“Improving your nutrition, exercise, social connections, and making sure your brain stays healthy are some of the most important steps you can take to control health spending,” Vernon says. “All of these things come down to things your grandma could have told you: Eat a good diverse diet with lots of fruits and vegetables, and avoid foods that cause inflammation. And keep your weight at a healthy level.”

Researchers have found, he adds, that exercise plays a role in getting blood flowing to the brain, and this may help somewhat in avoiding the onset of dementia and Alzheimer’s.

What type of exercise? It doesn’t much matter--just something that gets you moving three or four times a week will produce tremendous gains.

“Find something now that you like doing that you can keep doing for the rest of your life,” he suggests. “And it’s never too late. If you’re already retired, put on your sneakers and get out for a walk.”

Mark Miller is a freelance columnist for Morningstar. The views expressed in this column do not necessarily reflect the views of Morningstar.