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How to manage health care costs in retirement

We all know that health care costs continue to skyrocket, but how many of us consider what those rising costs will mean for retirement?

Gone are the days when retirement meant a lifelong pension and health care. Even some current retirees who were promised these things are having the rug pulled out from under them when their former employers find that they can no longer afford to insure them. So when it comes to your health care in retirement, it pays to plan ahead and not count on your employer. Here is what you need to know about staying healthy (and financially stable) after retirement:

Hang in there until Medicare kicks in

If you can hold off on retirement until age 65, you'll have a leg up on health care costs, since you'll then be eligible for Medicare, the federal health insurance program for seniors over 65 and the disabled. While all the rules and regulations for Medicare are dizzyingly complex, here is a basic breakdown of the four types of Medicare:

Medicare Part A covers seniors who need to be hospitalized. As long as you have paid into Social Security for at least ten years, you pay no premiums for using Part A.

Medicare Part B covers doctor visits and some outpatient needs, such as physical therapy and medical equipment. Some preventive care is also covered under Part B. Seniors using Part B must pay a monthly premium of around $100, although the premiums go up depending on their income.

Take special care to enroll for Medicare Part B when you are eligible because there's a stiff penalty for not doing so. For each 12 month period you delay, the premiums go up 10% for the rest of your life if you ever sign up. One of my aunts mistakenly thought she could save some money by waiting 3 years after she became eligible before she signed up. Big mistake. Not only did she not have coverage and paid all her checkups out of pocket for 3 years, but her premiums are also now 30% more than what she would've been paying and that penalty will continue for the rest of her life.

Medicare Part C is also referred to as Medicare Advantage. Part C consists of private insurance plans that are run through Medicare. Basically, these plans offer additional coverage to what you get through Parts A and B. You will have to pay a monthly premium for Part C, which varies from state to state and insurer to insurer.

Medicare Part D is a separate policy that you purchase through a private insurer. This policy covers prescription drugs.

Maintain coverage

If you choose to retire early or are laid off from your job before age 65, find a way to continue your health insurance until you are eligible for Medicare. According to US News and World Report, "workers who retire before they qualify for Medicare at age 65 often face the steepest health care costs. According to a Towers Perrin survey, the average cost of premiums for employer-provided coverage for retirees under 65 is $13,308 a year. The typical early retiree is expected to pick up $6,960 of that tab."

If you are laid off, remember that you have the option of continuing on your employer's coverage through COBRA, which lasts 18 months after your termination date. Alternatively, you could join your spouse's health care plan or purchase an individual plan. You can also look for a plan in the Affordable Care Act Health Insurance Marketplace. The good news is that anyone who becomes unemployed qualifies for the Special Enrollment Period, which allows the participants to enroll or change their healthcare plan.

None of these options are cheap, but you may be able to get a higher subsidy in the case of the marketplace plans because your income is now projected to be lower. In any case, all of these options will help keep your retirement nest egg safe—rather than seeing it all eaten up by one medical emergency.

Consider a Health Savings Account (HSA)

An HSA can work much like an advanced version of retirement investment accounts: you contribute money on a pre-tax basis and grow tax-free. Withdrawals are also tax-free even if the account grows into the millions as long as you use the funds for medical costs. That's why you sometimes hear how HSAs are triple tax-free accounts.

Be careful if you use the funds for non-medical costs though. Any withdrawal from your HSA for non-medical costs will cost you in taxes, and withdrawal before age 65 costs you a 10% penalty as well. Unlike contributions to a Flexible Spending Account (FSA), the money you contribute to an HSA won't be lost if you don't use it by year-end. That's why you can put money in there and just let it accumulate until the time you need it.

There's one more caveat. To get the tax breaks on an HSA, you need to also be enrolled in a High Deductible Health Plan. This means that you will have to plan for paying for the deductible every year for even your routine medical needs.

The bottom line

These days, retirement planning needs to include specific plans for health care. Costs keep going up year after year and there are no signs of it relenting. One mishap can ruin your retirement. That's why you need to make sure you take the time to decide how you will handle your health care costs in retirement.


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