Retirement Planning: 5 Ways To Make the Most of Your Health Insurance Benefits
Healthcare is one of the most significant expenses you’ll have in retirement. It’s also one of the most challenging costs to predict and plan for.
Retirement Savings: I Lost $400K in a Roth IRA
More: 3 Ways To Recession-Proof Your Retirement
A report by the Employee Benefit Research Institute found a 65-year-old couple may need as much as $383,000 saved to have a 90% chance of covering their healthcare spending needs.
Americans are living longer, and healthcare costs continue to rise, often outpacing inflation. While previous generations had access to employer and union-sponsored health benefits in retirement, it’s less likely you’ll have that supplemental insurance.
That means you need to start preparing now. Here are five ways to make the most of your time before retirement.
1. Know Your Health Insurance Options
There are quite a few decisions to make as you near retirement, and what to do about your health insurance should be top of mind. As you approach retirement, take the time to review and understand your health insurance options. It often requires “a strategic approach,” said Eliza Arnold, founder of Arnie, a retirement savings platform.
If you’re retiring before you have Medicare eligibility, you’ll need to find coverage elsewhere. If you recently retired, you can stay on your existing employer’s play under COBRA, though this option is often costly. You’ll typically have to pay for the total cost of coverage (including the part your employer previously subsidized).
If your spouse is still working, you can enroll in their plan. Retirement or job loss is considered a covered event for special enrollment so that you can enroll in the public marketplace and shop for plans under the Affordable Care Act (ACA). You may sometimes qualify for federal subsidies depending on your income, said Arnold. There are also private health plans, which may be more expensive or restrictive depending on the insurer.
Remember that just because you aren’t working anymore, that doesn’t mean you’re not making an income — at least in the eyes of health insurers.
“It’s crucial to understand that having retiree health benefits impacts the availability of premium tax credits for Marketplace plans,” said Arnold. “Also, retirees should be aware that withdrawals from IRAs or 401(k)s are typically considered income, influencing subsidy qualifications.”
2. Plan for Medicare Enrollment
You typically qualify for Medicare when you turn 65. Keep in mind that if you don’t sign up during your initial enrollment period, you could face a penalty unless you’re still working and have employer-based health insurance. The penalty is severe: Each year you go without coverage, your Medicare Part B premiums will increase by 10%.
Here’s a quick look at what Medicare covers:
Part A covers hospital stays and is free for most people, though there is an annual deductible ($1,632 for 2024).
Part B covers doctor visits, preventative care, and medical equipment and has a set monthly premium ($174.70 in 2024) and an annual deductible of $240.
Part C, also known as Medicare Advantage, is an all-in-one health plan that offers some coverage included in Parts A and B but also covers services not covered. It’s completely separate from Medicare and is offered by approved private insurers. The average premium is around $18.50.
Part D is prescription drug coverage, and premiums depend on your income.
Medigap policies are supplemental policies designed to fill in the gaps that Medicare Parts A and B don’t cover. Premiums vary widely depending on where you live and your health.
Knowing each aspect of Medicare and how much coverage may cost can help you better estimate how much to save. It’s also important to understand what Medicare will cover and not cover so you can more accurately predict your future healthcare expenses.
It’s smart to enroll in Parts A, B, and D as soon as you’re eligible to avoid future penalties. You can always switch around plans later. You may also want to consider reducing your income. Medicare premiums are often based on modified adjusted gross income, so if you can adjust this number, you may have lower overall healthcare costs.
One way to lower your overall taxable income in retirement is to shift some of your money from pre-tax retirement accounts — like a 401(k) — to post-tax retirement accounts, like a Roth IRA. Roth accounts typically allow for tax-free withdrawals, which will lower your overall taxable income.
3. Delay Taking Social Security (If Possible)
Most people can begin claiming Social Security benefits at age 62, though it’s often not in your best interest to do so.
Why? The amount of your Social Security benefit depends on what age you start claiming benefits. The longer you work and the later your claim benefits, the higher your monthly benefit will be.
It’s not always possible for someone to delay taking Social Security. But if you can afford to wait, and plan to retire before age 65, consider finding alternative coverage until you are eligible for Medicare.
4. Take Advantage of a Health Savings Account (HSA)
If you’re still employed and have a health insurance plan that qualifies for a health savings account (HSA), you should consider signing up. These plans are triple-tax advantaged. You can contribute pre-tax dollars to them and grow your money tax-free, and then withdraw it tax-free if you’re using it for qualified medical expenses.
Qualified medical expenses include Medicare premiums, long-term care expenses, prescriptions, hospital stays and more.
The benefits get even better once you reach age 65. After that, you can use money in your HSA for any expenses (even nonmedical ones) without any penalties. But keep in mind that withdrawals used for regular purchases will be taxed.
You can contribute up to $4,150 in 2024 (families can contribute up to $8,300), and just sit back and let your money grow tax free. If you’re over age 55, you can contribute an additional $1,000 catch-up contribution each year. Unlike the flexible savings account, you can leave your money in your HSA for years.
Plus, you can even invest your HSA earnings in the stock market to help them grow faster.
Contributing to an HSA helps you save for healthcare costs in retirement. By contributing to your HSA throughout your working years, you can accumulate funds that can be used tax-free for qualified medical expenses in retirement, including Medicare premiums, long-term care expenses, and specific out-of-pocket costs.
5. Consider Purchasing Long-Term Care Insurance
Long-term care insurance has a reputation for being pricey. But this type of insurance shouldn’t be overlooked. It often offers a daily benefit that covers comprehensive care, including special care facilities, nursing homes, assisted living centers, home aid help, and more. Most health insurance policies — including Medicare — don’t cover this type of care.
According to data from 2020, an American adult turning 65 has a 70% chance of needing long-term care at some point — and this type of care is very expensive. The average nursing home costs $7,900 for a semi-private room and $9,000 for a private room — that’s up to $108,000 per year.
The earlier you sign up for long-term care insurance, the lower your annual premium will be, and it won’t change as long as you keep the policy active. Waiting from age 55 to age 65 to apply for long-term care insurance will cost you almost 50% more in premiums.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Retirement Planning: 5 Ways To Make the Most of Your Health Insurance Benefits
