How to Plan for Health Care Costs in Retirement

Health care coverage is one of the necessary items we pay for in some way throughout most of our life. It’s smart to have when it’s needed, and it helps protect you financially should a health issue arise. During earning years, premium increases and coverage costs are built into your overall budget and often come out of your paycheck before you ever see it, but what about in retirement?

A PricewaterhouseCoopers financial wellness study found that 38% of baby boomers said that health care costs are a top fear—higher than those who were most afraid of running out of money!

So how can you calculate what your health care costs could be once you are no longer earning income, but still need coverage?

A free health care cost estimator tool like this one from Vanguard can help you plan and budget for health care costs in retirement, including premiums and out-of-pocket costs for various scenarios and locations. It can help you understand your cost per year (which ranges from $5,000-$10,000 for Medicare premiums), supplements and out-of-pocket costs per person. This is before your Income-Related Monthly Adjustment Amount (IRMAA), which is determined by your Modified Adjustment Gross Income (MAGI) from your tax return from two years ago. Modified Adjusted Gross Income (MAGI) is calculated by adding tax-exempt interest income to your tax return Adjusted Gross Income (AGI).

In addition to the estimator tool, here are a few things to be aware of if you are approaching age 65 that can assist with your retirement health care coverage planning:

• Form SSA-44 can be filed to request a waiver of the IRMAA surcharge premium in the case of an unusual life event causing income surge.
• You can delay Medicare past age 65 if you are covered by an employer health plan that has 20 or more employees.
• If you sign up for Social Security benefits you turn 65, then you are auto enrolled in Medicare at age 65 and you must return Medicare cards to unenroll.
• Health Savings Account (HSA) contributors cannot be enrolled in Medicare.
• You have six months to get Medigap coverage after enrolling in Medicare with no medical underwriting.
• Medigap open enrollment period is Oct. 15-Dec. 7 this year, unless there is a life event allowing enrollment outside of this period.

Bottom line: Your expected health care costs will be unique to you and will be impacted by your health status, Medicare plan choice, the amount your employer currently subsidizes for your health care (and what that loss of subsidy does to your budget), retirement age, location and income in retirement.

It is wise to consider health care options before you retire and plan to make health care spending part of your budget. If you have questions about health care planning in retirement, or any other financial planning questions, please feel free to contact us online or at (515) 225-6000.