When working through retirement planning with clients, one of the questions we hear most often is “What will my health care costs be in retirement?”
This is an important topic to review as part of an overall financial planning model, both from a cash flow perspective and because it is a point of concern for most individuals approaching retirement.
This overview is intended to provide basic information relating to definitions and terms frequently utilized in health insurance, and to provide some perspective on estimated costs.
While some individuals have healthcare benefits from a former employer or other entity that will carry forward into retirement, this overview assumes that you do not have any of these options. If you are eligible to maintain a company-sponsored plan that offers lower cost benefits in retirement, it is often best to continue with that plan.
Healthcare costs if you retire before age 65
If you retire prior to age 65, you will need to purchase a health coverage policy through a private provider or, if eligible, through one of the state-sponsored or federal healthcare insurance providers under the Affordable Care Act (commonly known as “Obamacare”). Since there is a very low maximum income requirement to participate in any of the federal exchange programs, this article focuses on the cost of private insurance.
Private insurance costs will vary based on services and level of coverage provided, deductibles, and other factors, but generally consumers can focus on a few key items to get a basic understanding of the total anticipated cost of health care:
- Premiums: This is the amount you will have to pay each month to maintain the insurance coverage.
- Deductible: This is the annual amount that you must pay before insurance begins to pay for your care. If the annual deductible is $5,000, then you may be responsible for up to the first $5,000 of medical expenses. You may still be required to cover additional expenses after the annual deductible has been satisfied (see Coinsurance below), until you reach the annual out-of-pocket maximum set by your plan.
- Copay: This is the payment you may have to make for each visit to a physician, hospital, or Emergency Room. Due to the high cost of care at the ER, copays may be significantly higher for those visits. Copays usually do not apply toward your annual deductible but do apply toward your out-of-pocket maximum.
- In-network vs Out-of-network: In most plans you will see a difference between in-network and out-of-network costs. “In-network” refers to healthcare providers or facilities that are part of the plan’s network of contracted providers. “Out-of-network” refers to providers or facilities that do not have a contract with your plan and may therefore result in higher costs. In some cases, your plan may not cover any out-of-network costs except in an emergency. If you have reached your maximum annual out-of-pocket amount you will have no additional costs for care from in-network providers. For this reason, it is important to understand which providers are “in-network” for any given plan.
- Coinsurance: After reaching your deductible, you may also be responsible for a percentage of the cost of care until your out-of-pocket maximum is met. Coinsurance is typically 20% – 60% of the total cost, even for in-network care. Your cost may be higher if you see an out-of-network provider.
- Annual out-of-pocket maximum: This is the most important number to understand. This number represents the maximum amount that you will have to pay out-of-pocket each year for health care, including deductibles, copays and coinsurance (premiums are in addition to this amount.) Once this amount is reached you will have no additional health care costs for in-network treatment that year. In 2020, federal guidelines stipulate that an out-of-pocket maximum may not exceed $8,150 for an individual and $16,300 for a family. For 2021, those maximums will be increased to $8,550 for an individual and $17,100 for a family.
Healthcare costs if you retire after 65
Once you are eligible for Medicare at age 65, Parts A and B will typically become your primary coverage. You can then purchase additional private insurance to cover gaps or specific coverage most relevant to your individual situation (often referred to as Medigap or Medicare Supplemental insurance).
Medicare Part A will be provided at no cost for most people. The premium for Part B is dependent upon your Adjusted Gross Income (“AGI”), based on a two-year lookback, and ranges from $144.60 per month to $491.60 per month in 2020. Part B also has a deductible of $198 per year, plus 20% coinsurance after the deductible is met.
A broad range of options are available for Medigap, or Medicare Supplemental insurance policies. These are intended to cover the cost of care that Medicare itself does not cover or does not cover in full. Plans vary greatly, with some having no premium or deductible, others having both a premium and a deductible, and various coverage levels for different services. Each plan will set its own premium, deductible and service offerings. These plans function in the same way as private insurance plans, with the same Federal out-of-pocket limits.
Each person’s needs for both private insurance and Medicare are unique. Certain prescription drugs or treatments, using out-of-network providers and other factors may significantly affect out-of-pocket costs, making costs difficult to estimate. It is important to understand the cost structure and covered services provided by your plan of choice. A Freestone Client Advisor can help you build cost estimates into your financial plan and can also provide referrals to healthcare insurance specialists, if needed.
IMPORTANT DISCLOSURES: This article contains general information, opinions, and market commentary and is only a summary of certain issues and events that we believe might be of interest generally. Nothing in this article is intended to provide, and you should not rely on it for, accounting, legal, tax, healthcare or retirement advice or recommendations. We are not making any specific recommendations regarding any security or investment or retirement healthcare strategy, and you should not make any decisions based on the information in this article. While we believe the information in this article is reliable, we do not make any representation or warranty concerning the accuracy of the data in this article and we disclaim any liability arising out of your use of, or reliance on, such information. The information and opinions in this article are subject to change without notice, and we do not undertake any responsibility to update any information herein or advice you of any change in such information in the future. This article speaks only as of the date indicated. Portions of this article constitute “forward thinking statements” and are subject to a number of significant risks and uncertainties. Any such forward-looking statements should not be relied upon as predictions of future events or results.