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5 Ways To Control Health Care Costs In Retirement

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August 09, 2020

5 Ways to Control Health Care Costs in Retirement

Planning for future health care costs, which includes insurance premiums and out-of-pocket expenses, is an essential piece of any retirement plan and one of the most difficult items for which to plan.

The reasons are:

  • They are one of the larger expenses you will incur during your retirement as the need for health care services increases as we age. In their 2019 study, Fidelity projected that the average couple retiring needs $285,000 at retirement to be able to pay for their future health care expenses (assuming average health and life expectancy; not including long term care costs).
  • Health care cost rise much faster than the overall inflation rate (5-6% vs. about 3%).
  • They are unpredictable (i.e., who knows what types of illnesses or conditions you will face decades in future, particularly if you are healthy and have no chronic illnesses now).

Since everyone's health care experience is unique, some people will pay less but, unfortunately, some people will have the misfortune of having to pay a lot more. The high degree of uncertainty of your future health care costs suggests you should do everything possible to control them.

Here are five things you can do:

Make informed decisions about Medicare and do not miss enrollment deadlines

You must enroll in Medicare when you turn 65 (the "Initial Enrollment Period") unless you are covered by an employer group plan (including your spouse's plan) that covers 20 or more employees. Note that coverage under COBRA or a retiree health care plan does not count.

If you do have valid employer coverage at age 65, you will have a "Special Enrollment Period" when the coverage terminates.

If you do not enroll in Medicare when required:

  • You may not be covered by insurance and, if you incur health care expenses, you may have to pay the entire bill (even if you have another plan).
  • When you do enroll (which you may only do during the annual "General Enrollment Period" from January 1 through March 31 each year) you be charged a permanent, late-enrollment penalty and your coverage would not start until July 1.

Shop around for private insurance

Medicare Parts A and B is not all you need. You must also purchase prescription drug coverage (Part D) and a supplemental policy (Medigap) if you decide to go with original Medicare, or a Medicare Advantage Plan (Part C). These policies are purchased from private insurers.

You should purchase the prescription drug plan with the lowest out-of-pocket costs for the medications you take. The premiums and copayments for different medications vary by insurer. Prescription drug plan premiums and costs for medications may change each year, so it is essential to re-evaluate your coverage annually.

A Medigap policy covers deductibles and co-payments you will pay out-of-pocket if you only have Medicare Part A and B. There are several plans, identified by letters (A, B, C, D, F, G, K, L, M, and N), which provide different types and levels of coverage. For example, Plan A coverage is the most limited and Plan F is the most comprehensive. The plans are standardized so all insurers must provide the same coverage for the same letter plan. However, the premiums vary significantly by insurer, state, and gender, so it important to shop around and re-evaluate your choice each year.

Medicare Advantage plans replace the need for prescription drug coverage and Medigap policies. These plans tend to have low out-of-pocket costs (copayments) if you use "in-network" providers and may provide coverage for items not covered by original Medicare such as dental, vision, and hearing. Premiums will vary depending on the types of coverage. Also, the choices of "in-network" providers can be restrictive, and you will pay much more if you go to an "out-of-network" provider.

Be a smart consumer about health care costs

  • Get into the habit of asking whether the doctor you are about to see if they accept Medicare. Some doctors do not accept Medicare patients or charge more for services than will reimbursed by Medicare. In that case, you would have to pay the difference.
  • Avoid unnecessary doctor visits or costly tests, as long as you are not sacrificing your health.
  • If a generic medication is available, you may be able to save money versus taking the brand-name version of the same medication (assuming it works just as well).

Beware of IRMAA

  • IRMAA stands for Income-Related Monthly Adjustment Amount.
  • Medicare Part B and D premiums get higher as income exceeds certain thresholds. For example, in 2020, the base Part B monthly premium is $144.60 if Modified Adjusted Gross Income (MAGI) is below $87,000 (single) or $174,000 (married filing jointly). If MAGI is between $136,001 and $163,000 (single) or $272,001 and $326,000 (married filing jointly), the Part B monthly premium is $376.
  • To the extent possible, manage your finances so your MAGI is at the lowest level. This is possible with some skillful planning.

Live a healthy lifestyle and seek preventative care

  • Exercise regularly and follow a proper diet
  • Get enough sleep
  • Avoid unhealthy activities such as excessive alcohol consumption and any tobacco use
  • See your doctor for annual physical exams
  • Get regular screenings and immunizations (e.g., mammogram, prostate cancer screen, colonoscopy, flu shot) as recommended by your doctor

Admittedly, this article only scratches the surface of the complex world of managing health care costs in retirement, but hopefully it demonstrated the need for you to be educated and make smart decisions.

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About the author

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Steve B. Goldstein

Vice President, Private CFO®

Steve Goldstein is a Vice President, Private CFO® with oXYGen Financial, Inc., and is based in Alpharetta, Georgia.He is a 17+ year veteran of the financial services industry. Steve is a retirement-focused financial planner and investment advisory whose mission is to help people live the best life possible during their retirement by making sure their finances provide for their needs and their wants all the way through their lifetime.

Steve started his career in financial services with American Express Financial Advisors in 2002 after working in corporate financial management for many years. He moved to oXYGen Financial in 2008 shortly after the company was founded. Steve earned the Certified Financial Planner certification in 2006, the Chartered Retirement Planning CounselorSM designation in 2008, and the Retirement Income Certified Professional® designation in 2013. His background also includes an MBA degree in Finance and Accounting from the University of Rochester and a BA degree in Business Economics from The State University of New York at Oneonta.

Steve was born and raised in the Bronx, NY, lived for several years in the NY suburbs, and moved to the Atlanta area in 1994 with his wife, Beth, and two children who he proudly says are now responsible adults with good jobs living on their own. In his spare time, Steve enjoys watching sports, exercising regularly, playing classic rock and blues guitar, and tackling home improvement projects.

Background and qualification information is available at FINRA's BrokerCheck website.

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