Joe
Catanzarite Forbes Councils Member,
CFP is a financial educator, author,
speaker and retirement planner in South Bend, Indiana. Jan 23, 2020, 08:00am
The greatest challenge in retirement planning
isn’t deciding whether to buy a huge RV and figuring out which sunny beach to
visit. For many, especially those who wish to retire early, it’s healthcare.
Many who would otherwise have the resources to retire long before 65 still see
early retirement as impossible because of the high cost of health insurance for
those who are not yet eligible for Medicare.
Four key healthcare questions often come up
when making retirement decisions:
“I’m retiring before age 65. Should I elect
COBRA, purchase individual coverage or apply for membership in a health share?”
If you want to retire before you are eligible
for Medicare, you may be in for some serious sticker shock when it comes to
healthcare. There are five options: COBRA, the healthcare exchange (or
“Affordable Care Act”), a health share plan, short-term health insurance plans
or going without. Going without is never recommended, and even if you have what
seems to be a sizable nest egg, one serious medical emergency can wipe it out
very quickly. Also, so-called short-term health insurance plans offer limited
benefits, do not adhere to ACA standards and do not cover preexisting
conditions. With that in mind, here is a look at the other three options:
• COBRA: You may have enjoyed Cadillac
coverage from your employer, and if you were lucky, you were shielded from the
actual premium due to employer subsidies. Under COBRA, employers must offer
identical coverage after separation of service, but there are two caveats: That
coverage is almost never subsidized (meaning you will need to pay the full
amount), and it is only good for 18 months. According to the Kaiser Family Foundation,
the estimated annual premium for employer-sponsored family health insurance
coverage was more than $20,000 in 2019, and if you retire early and take the
COBRA option, you will be on the hook for that full amount.
• ACA Healthcare Exchange: The ACA offers another option with
income-subsidized policies. Depending on your post-retirement income, this may
be an option. Be aware, though, that there are two downsides. Deductibles can
be steep, up to $15,000 a year. Affordability levels upon which the subsidies
are based are tied to income, but there is also an “affordability cliff” —
meaning that if you are retiring with even a modest level of middle-class
income, you may not qualify for the subsidy. In addition, the average
unsubsidized cost for those between 55 and 64 has risen to $790 per month,
according to an eHealth study. Some proposals to alter, repeal or replace the
ACA would increase this age tax substantially.
• Health share: Health sharing ministries are not actually
insurance, but are cooperatives that share health costs among members. The
health share does not accept risk or make any guarantees. New members must
apply and be accepted to the group, and preexisting conditions may be excluded
for a period of time. In some states, health share plans are exempt from laws
that otherwise govern health insurance. They do not need to comply with the
requirements of ACA plans, and they are not HSA contribution compatible.
Because these plans do not fit into standard insurance regulations and consumer
protections, you may have fewer legal protections, and your healthcare costs
are likely to be higher because unlike traditional insurance companies, health
shares do not negotiate discount rates with providers.
“Which Medicare track is right for me: Medicare
Advantage or Medicare supplement and Part D?”
Consumers between 50 and 64 face rapidly
escalating healthcare costs, but once you make it to 65, you can sign up for
Medicare. The downside is that Medicare is just as confusing as private
insurance. Several plans are available, presenting you with a dizzying array of
acronyms and confusing Parts A, B, C and D. Most Medicare Advantage (Part C)
plans will have a deductible, copay and coinsurance, but costs will be
affordable. Medicare supplement plans, on the other hand, will cover most
nonprescription medical costs, but will have higher premiums. The biggest
deciding factor in selecting Medicare coverage is understanding which plans
have deductibles, copays and coinsurance; understanding this will help avoid
unexpected bills later on.
“Why is my Medicare premium higher than the
base amount?”
One of the least understood parts of Medicare
is the fact that not everyone pays the same premium for Medicare Parts B and D.
Depending on your income, you may be paying as much as three times the “base
cost” of the plans. You may not think you will be affected, but taking one
large distribution from an employer stock plan or taking a Roth conversion
could result in your Medicare Part B premiums going from $135 a month to $460 a
month. This impact can be felt for two years, because of how Medicare looks
back at your tax records.
“What if I need long-term care in the future?”
We all want to be as independent as possible
after retirement, but the need for long-term care is something we all need to
prepare for. And it’s no secret that the cost of long-term care is high, and
continues to rise. This presents different challenges, depending on your
situation. Medicare does not actually cover long-term care, though it does cover
medical services provided while staying in a long-term care facility. Some
short-term stays may qualify under Medicare, and low-income individuals may
qualify for Medicaid long-term care assistance. As a result, many are faced
with the difficult decision of having to spend down their resources in order to
qualify. Long-term care insurance may be another option, especially if you have
a nest egg you want to protect for your heirs.
The information provided here is not
investment, tax or financial advice. You should consult with a licensed
professional for advice concerning your specific situation.
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