If you read last month's column, you know what you can do to help clients who are still in the work force and have several years to plan for potential retirement health care costs. This month we'll look at tackling a tougher problem: how to keep future doctor's bills from wiping out the financial security of clients who have already retired.
Just because they don't bring it up in meetings, doesn't mean your clients aren't worried about medical bills during their golden years. Fidelity Investments recently released a survey that showed 70 percent of couples are concerned about paying for health care during the latter chapters of their life, and 47 percent cited it as their biggest concern.
After all, the numbers can add up — and quick. Depending on when your clients retire and how long they live, the cost for various medical maladies could range from $100,000 to $1,000,000, according to the Employee Benefit Research Institute — and that doesn't include long-term care or nursing home expenses.
Retiring Before 65
Whether they retire of their own volition or are terminated, many of your under-65 clients can't count on their past employers to continue offering health insurance, or even to provide access to the coverage. And this is an age at which your clients are just beginning to suffer ailments that will cost a lot of money to treat, yet may also render them unable to purchase traditional health care coverage on their own.
Here are some options that are available to your clients to offset health care costs incurred before they become eligible for Medicare.
It may sound like a strike force led by Chuck Norris, but the acronym stands for Consolidated Omnibus Budget Reconciliation Act. The law allows certain workers who have lost their jobs or had hours reduced to continue to qualify for their employers' health care insurance, though they usually have to pay the entire premium themselves.
If your client qualifies, under COBRA she can extend her employer's coverage for up to 18 months, depending on her individual circumstances. COBRA also may help her and her family in the eventual purchase of an individual health insurance policy, even if she, or her dependents, has a pre-existing condition. Find out more at www.dol.gov.
Keeping Group Coverage
COBRA-based coverage usually only serves as a bridge to a more permanent solution. Of course, your pre-Medicare-age clients can look for another job that provides health care insurance, but then they wouldn't really be “retired,” now, would they?
They may be able to avoid working and still find a group health insurance policy through a professional organization, or the alumni association of their alma mater. Recently AARP announced a partnership with Aetna to ostensibly provide better health insurance options to members aged 50 to 64.
Private Health Insurance
Until your retired client turns 65, she will likely have to purchase an individual health insurance policy. Unemployed individuals can even take pre-59 distributions from an IRA to pay for individual health insurance. Although income taxes will still be owed, these individuals can avoid the 10 percent early withdrawal penalty. The tax code pertaining to this strategy is at IRS Sec. 72(t)(2)(D).
Retiring After 65
This age typically represents a Holy Grail to the minds of many retirees, as turning 65 allows most Americans to qualify for Medicare coverage (the details of which are below). But, before your clients jump for joy (and risk a fractured hip) they should know this: Even with Medicare's rapidly rising premiums and coverage that barely pays for half of the health care costs retirees typically incur, Medicare's trustees predict the program's trust funds will be exhausted in about 12 years.
Nevertheless, your clients (and you) need to be familiar with this better-than-nothing option. These are the basics behind the Alphabet Soup of Medicare coverage.
Medicare Part A: This basic component covers hospitalization, some home health care, and a narrow range of nursing home and hospice services. Your clients qualify for Medicare Part A on the first day of the month in which they turn 65 (unlike Social Security, the eligibility age is not scheduled for a gradual rise — yet). There is almost always no premium for Medicare Part A coverage.
Calculating clients with a long life expectancy may choose to delay taking Social Security until well after reaching full retirement age. But they are still required to enroll in Medicare upon reaching their 65th birthday.
Medicare Part B: Unless retirees specifically decline Medicare Part B coverage, they will be enrolled in the program automatically when they sign up for Medicare Part A. In addition to some home health care, Medicare Part B pays for outpatient care, doctors' fees and some preventive services. The monthly premiums are based on adjusted gross income, and range from $93.50 to $161.40.
Medicare Part C: Known more commonly as “Medicare Advantage,” this is an optional managed-care service offered by private companies — kind of like an HMO or PPO. The “advantage” of these plans is that they can reduce out-of-pocket expenses for deductibles and co-payments. The availability and particulars vary by state and company, but your clients can get more information at www.medicare.gov.
Medicare Part D: This section offers the recently-introduced voluntary prescription drug coverage that is offered via myriad private vendors. Enrollment must be made within three months of achieving eligibility for Medicare, and participants are allowed to switch plans from Nov. 15 through Dec. 31 of each calendar year. Premiums and coverage varies according to each plan's terms.
Medigap: A supplemental insurance policy to Medicare, this type of coverage is sold by private insurers in 47 states and in 12 standard types. The details differ based on what kind of plan (A through L) is selected, and what state the individual resides in, but suffice it to say that more coverage costs more money.
One item of special note: Are your clients traveling abroad? Before you wish a hearty bon voyage, make sure they know that Medicare doesn't cover any health care treatment incurred outside of the U.S. They should look into obtaining at least a temporary travel health insurance policy to cover them while they're overseas.
When Catastrophe Strikes
You can plan all you want for prospective health care costs, but your retired client may still require significant medical treatment that isn't covered by either private or government insurance. The best-case scenario is that he'll walk out of the hospital burdened with medical bills worth several hundred thousand dollars. Here's how you can make sure he's happy to have lived through the procedure, and how to make sure there's enough money for his now-extended life span.
Haggling on health care costs
Yes, there's more “mercenary” and less “mercy” in the modern medical system. But most hospitals and clinics still recognize that many patients just can't afford to pay for all of the treatment they've received.
Negotiating what your client's final financial obligation will be begins after the procedures are completed and the bills are issued. First, a meeting should be scheduled between a representative of the health care facility's billing department and your client, where all activity on the invoices will be matched with the actual treatment received.
Then your client can relate any difficulty he or she might have making a payment of this magnitude, especially as a retiree with limited earning power. The hospital will then offer up a payment plan whose terms will hopefully be amenable to both parties. The final tally paid by your client may be substantially less than the initial sum billed by the health care providers.
Tapping non-traditional sources
Once your clients know what they really owe for health care received, they may be tempted to pay the amount from the accounts they have with you, and be done with it. But taking the money from retirement accounts could leave them with an outsized tax bill, and tapping non-sheltered assets might put them in a future liquidity crunch. (The pain of paying for un-reimbursed medical expenses is lessened somewhat by the fact that amounts exceeding 7.5 percent of your client's annual adjusted gross income can be tax deductible.)
Instead, you should suggest a couple of other sources of funds. First, your clients may have cash built up in an unneeded life insurance policy, or a policy that gives access to the death benefit before the insured dies (as long as the insured has been diagnosed with a terminal illness).
Then there is the family home. Ideally your clients will already have a home equity line of credit (HELOC) that can be drawn upon immediately to pay horrific hospital bills. But a second solution (albeit one with usually much higher expenses than a HELOC) is a reverse mortgage. Your clients get access to the built-up home equity, yet can still choose to remain in the house. You can find out more about this solution at www.reversemortgage.org.
Reaping the rewards
You probably didn't get into this business hoping to spend hours poring over the Medicare Web site. But combine the potential severity of health care costs with the alarm your clients feel over paying for health care in retirement, and it becomes one more task you must complete to ensure their financial security.
And really, it's in your own self-interest, too. Fidelity estimates that a 65-year-old couple today needs $215,000 to pay for out-of-pocket health care costs during retirement, assuming he makes it to 82 and she dies at 85. If you have 100 retired clients, multiply that number times 100, and consider that your work may prevent $20 million or more in assets from leaving your book for the local hospital.
Writer's BIO: Kevin McKinley is a CFP and vice president of investments at a regional brokerage and author of Make Your Kid a Millionaire — 11 Easy Ways Anyone Can Secure a Child's Financial Future. kevinmckinley.com
What's eating up health care spending?
Fidelity Investments reckons that a 65-year-old couple retiring today needs $215,000 to pay for out-of-pocket health care costs during their retirement, assuming he makes it to 82 and she dies at 85.
And that's the good news — that figure doesn't even include any long-term care expenses, and assumes that they'll have some type of retiree health insurance from a past employer or union. Here's what Fidelity thinks that chunk of money will go to:
Medicare Part B and D premiums $68,800 (32%)
Medicare co-payments, deductibles, and co-insurance $75,250 (35%)
Prescription drug costs $70,950 (33%)
Source: Fidelity Investments