We all know that planning for health care in retirement isn’t something many people give much thought to—until they get close to retirement age. As health-care costs in retirement are now projected to reach $245,000 for a couple retiring at age 65, according to the Fidelity’s 2015 Retirement Health Care Cost Estimate, waiting until retirement is simply too late.
Many of my friends had planned to retire around age 62, but the issue of affordable health insurance pre-Medicare eligibility has them tied up in knots. They may or may not have early retiree coverage, and they don’t realize their options. So they default to what they know best—continue to work, use their current employer’s plan and pay its associated costs, and miss out on the opportunities in today’s marketplace.
For those under 65, retirement health-care costs will certainly be higher: employees are shouldering 77 percent higher out-of-pocket costs than they did a decade ago, according to a Kaiser Family Foundation analysis of data from 2004 to 2014; and employers continue to evaluate strategies to further scale back health-care benefits, if they offer them at all to retirees.
These strategies include more employers—83 percent—offering high-deductible health plans (HDHP), and 56 percent now offering HDHPs with health savings accounts, according to the PWC’s 2015 Health and Well-being Touchstone Survey. Large employers offered 5.7 health plans in 2015, compared to 3.6 plans in 2014. More employers are considering added cost sharing, with 48 percent studying pharmacy benefits and 42 percent reviewing their medical plan design, PWC reported. In addition, more employers are evaluating options to terminate employer-provided early retiree and retiree medical benefits, or shift these individuals to plans on the Health Insurance Marketplace.
By better understanding the changes in employer-provided health-care benefits—both for pre-retirees and retirees—financial advisors can play a crucial role in helping clients prepare for a changing health-care landscape and identify options to make health care more affordable as retirement approaches. Below are strategies important for financial advisors to include in overall planning.
Leverage High-Deductible Plans With Health Savings Accounts
Nearly one in four covered workers (24 percent) were enrolled in a high-deductible plan with a savings options in 2015, most notably a health savings account (HSA), up from just 14 percent in 2010, according to the Kaiser Family Foundation/Health Research & Education Trust (HREIT) 2015 Employer Health Benefits Survey.
In addition to providing health insurance for immediate needs, the HSA portion of these plans allows clients to save tax free for future health-care costs: the dollars contributed are tax deductible, the money grows tax free, and it can be withdrawn tax free to pay for out-of-pocket medical costs, including Medicare (but not Medigap) premiums in retirement. For 2016, the HSA contribution limit for individuals is $3,350 and for families $6,750, with the amount indexing to inflation each year.
This means millennials contributing the maximum annually could amass six-figure HSAs by the time they retire. However, according to the Employee Benefits Research Institute, HSA balances fall far short of this—with the average 2014 year-end account balance at just $1,933. Clients 55 and older can use a $1,000 catch-up contribution to add to their HSA savings.