In my career as a Medicare insurance agent, I am continually surprised at how many people are completely unprepared for the costs of healthcare in retirement.
In fact, in a recent study by the Blackstone Group, a whopping 79% of middle-income baby boomers said they have NO money at all set aside to cover their costs for care in retirement.
Some of them are unaware that Medicare costs money.
A recent attendee to our New-to-Medicare webinar was absolutely appalled to learn at age 65 that all the taxes she had been paying toward Medicare during her working years will only cover her Medicare Part A hospital benefits.
She had no idea that Medicare beneficiaries pay monthly premiums not just for Part B, but also for supplemental insurance and even more for drug coverage under Part D.
Some retirees have buckets of money set aside for rent, travel, and living expenses. Yet they have never had a single conversation with their financial planner about the costs of Medicare, the costs of supplementing Medicare and the costs of all the things that Medicare doesn’t cover.
Now imagine for a moment you were entering retirement better prepared? How would that feel? I’ll tell you: it feels fantastic and I’m going to show you the best tool for accomplishing that in later in this post.
The “Medicare Is Free” Myth
So, what stops hardworking, intelligent people from experiencing a retirement that is free from worry over healthcare costs?
It’s a simple assumption that the FICA payroll taxes that we pay throughout our working lives will pay 100% of our costs when we retire.
What people don’t know is that those taxes only fund our Part A hospital benefits. When you enroll in Medicare, you’ll pay monthly premiums for Parts B and D as well as deductibles, copays and coinsurance just like you pay on your current health insurance under 65.
CNBC reported that over half of people polled in a survey by the Nationwide Retirement Institute did not know that Medicare Part B isn’t free, and three in ten poll participants mistakenly believed that Medicare costs the same for everyone.
This assumption can gobble up your retirement faster than you can blink. I call it the Invisible Nest-Egg Eater, and here are the ways it can bite you.
How Your Nest-Egg Gets Silently Eaten
Here are some of the most common mistakes people make when planning for retirement that let this monster creep in quietly to devour your retirement savings.
Mistake #1: Failure to Discuss Healthcare with your Financial Planner
Talking about your health is a sensitive subject. Some financial planners may even be reluctant to bring it for fear that you may think they are prying into your personal information. However, it’s critically important that you thoroughly plan for the costs of healthcare in retirement, and your personal medical usage plays into that.
A recent study by Fidelity estimated that the average couple will need more than $280,000 for the costs of healthcare in retirement.
Ask your financial planner to help you estimate your future costs for Medicare, Medicare supplemental coverage, drug coverage, cancer coverage and long-term care.
Mistake #2: Assuming You’ll Have Continued Good Health
In today’s world, people are working longer into their elder years largely because so many jobs are internet based rather than manual labor. In a world like this, it’s very easy to assume that you may be able to keep your job into your seventies.
However, we never truly know just how long our good health will last.
I’ve seen many people sidelined with an injury or illness over the years that forced them to take their Social Security income benefits earlier than expected. Chronic illness will also drive up your healthcare spending.
When mapping out how much you’ll need for healthcare in retirement, be sure to also plan for the unexpected.
Mistake #3: Assuming You’ll Have Employment
We all hope that we’ll be able to age gracefully in our chosen careers. However, ageism in the workplace can be a real thing. If you lose your job, will you be able to get another one when you are 60, 65 or 70?
Always have a plan for how you’ll adapt if your source of income doesn’t last as long as you had hoped.
A Better Way to Build Your Medical Retirement Nest Egg
Now that you’re familiar with the mistakes, you’ll want to develop contingency plans. Your first priority should be to start developing a pool of money that you designate specifically for medical expenses in retirement, whenever that retirement may occur.
There is a savings vehicle that is perfect for this, and it’s called a health savings account.
What is a Health Savings Account?
A health savings account is a tax-advantaged account in which you can set aside money on a pre-tax basis to be used for qualified medical expenses. To open an H.S.A., you must first be enrolled in a qualified high deductible health insurance plan.
Money that you or your employer contribute to your account is tax-free. Check out these cool features:
Money contributed to your health savings account lowers your tax burden for the year. In 2019, you can contribute up to $3500 as an individual or up to $7000 for families and people aged 55 or older can contribute an extra $1000 contribution each year as a catch-up contribution.
You also never pay any FICA taxes on money you contribute to your HSA, and that is a unique feature which other types of investments do not share. This arguably makes health savings accounts one of the very best retirement savings vehicles in existence.
Qualified Medical Expenses
You can use the money that in your health savings account to pay for qualified medical expenses, including dental and vision expenses, for both yourself and your immediate family members, even if those members are not on the insurance plan.
The money deposited is also yours forever and it grows tax-free, earning interest which compounds over time. You can even invest the money in your H.S.A. into stocks or other investments such as mutual funds to help it grow more quickly.
Lastly, if you reach age 65 and you have a ton of money saved up in the account, you can withdraw money for non-medical expenses and you’ll pay just ordinary income tax, no penalty.
Setting Up your Medicare Medical Nest-Egg
So how do you put this amazing retirement vehicle into place and avoid the invisible nest-egg eater? Follow these steps:
- Enroll in a qualified high-deductible health plan through your employer or the healthcare exchange.
- Open a health savings account through your employer or with a local or online bank. Be sure to shop around for the best interest rate. There are online banks that may give you a higher interest rate than a brick and mortar bank.
- Automate your savings every month so that you never miss the money. You can set up an automatic payroll deduction or bank transfer from your checking account into your H.S.A. on a weekly or monthly basis.
- Retire with tens of thousands of tax-free dollars that you can use for Medicare premiums, deductibles, copays and coinsurance, you will enter retirement in better shape than most.
You now have a pool of money that you don’t even look at as completely separate than funds you’ve saved for rent/groceries/travel. You can then spend your retirement enjoying all the things about your golden years
Medicare and H.S.A.
Once you turn 65, you can’t continue to contribute to your health savings account if you have any part of Medicare active. So, if you plan to work past age 65 for a large employer that has 20 or more employees, you can delay enrollment into Medicare in order to keep contributing.
However, if you are married though and your younger spouse is also on the high deductible health plan, your spouse can contribute the family amount in his or her name. This is a popular option that many people use to continue growing their H.S.A.
Time to Get Started
Though saving for retirement in today’s day and age can be challenging, the good news is that it is never too late to start preparing for your future retirement costs. Consider beginning to build your own medical nest-egg so you can retire with the peace of mind that comes from knowing you can handle any medical situation that comes your way.