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Shockingly, many American women have an irrational fear of becoming bag ladies.
In the “Women, Money and Power” study by Allianz, almost half the women surveyed responded that they “often” or “sometimes” fear losing all their money and becoming homeless. This fear permeated all income levels — a third of respondents who make $200,000 or more per year still reported that they were afraid of becoming bag ladies.
The real worry, however, isn’t as extreme as losing everything and looking like an extra on “Les Mis.” It’s the slow and steady drip of increased health care expenses in retirement, which can leave you with all the time in the world but not the money to enjoy it.
When we think of what we’re going to spend our retirement savings on, we tend to think more about the fun stuff — spending our hard-earned cash on medical expenses feels like a kill-joy. I’d much rather rent a convertible and take a drive along Highway 1 in California or take a helicopter ride over the Grand Canyon than pay for Medicare Part D premiums and out-of-pocket medical expenses.
In order to do both, it’s important to plan ahead for health care expenses in retirement. Here are some ways to prepare:
Get an estimate of your health care expenses in retirement. Fidelity Benefits Consulting estimates that a couple aged 65 that retires in 2014 will need $220,000 for health care costs in retirement. Those with health problems may incur additional costs. To run a rough estimate of your health care costs at age 65, check out this calculator from HealthView Services.
Designate funds to pay for health care. My grandfather had a municipal bond portfolio he called his “health care fund.” Fortunately for him, he never needed to use it. But he guarded those funds, knowing he may need to use them to pay for medical expenses, long-term care or both. You could do the same, starting with a health savings account.
An HSA is a good start, since it features great tax incentives. It’s the only account I’m aware of that allows you to save pre-tax dollars and then withdraw the funds tax-free. The catch is that you have to use the funds for qualified medical expenses, but most people can expect to have a decent amount of those during retirement, anyway. You also are limited in the amount you can contribute — but something is better than nothing.
If you are enrolled in a high-deductible medical plan, you may qualify for a Health Savings Account. In 2015, the maximum contribution is $3,350 for an individual and $6,650 for a family (with an additional catch-up provision of $1,000 for those aged 55 and up). Funds not withdrawn for current out-of-pocket medical expenses can be carried well into retirement and withdrawn then.
Plan your retirement income with Medicare in mind. Higher-income earners pay higher premiums for Medicare Part B and D. When your income as a single taxpayer is higher than $85,000 ($170,000 for married couples filing jointly in 2014), and you are on Medicare, surcharges may be levied.
“Income” is defined as Modified Adjusted Gross Income, which includes income from almost any source you can think of — any money you make working in retirement, income from traditional IRAs and 401(k)s, dividends, capital gains income, Social Security, and more. It would not include the tax-free distribution from a Roth IRA or Roth 401(k). So having a Roth IRA or Roth 401(k) may hold additional advantages for retirees.
The IRS uses a 2-year look back when it calculates MAGI, so selling an investment and incurring large capital gains two years before you retire could affect how much you pay in Medicare premiums. Work with your financial advisor and/or tax advisor to diversify your income streams in retirement in preparation for a possible Medicare surcharge, as well as to employ post-retirement strategies to reduce your MAGI if possible.
Resource - SSA.gov - Medicare Premiums: Rules for Higher Income Beneficiaries
Become health care proficient. Is all this Medicare talk confusing? It might not be once you hit age 60, since that’s when everyone starts talking Medicare.
When my friends and family turned 50, the (fascinating) conversation revolved around colonoscopies. Once they hit 60, the talk was all about Medicare Parts A, B, and D, and whether to do the Medicare Advantage plan (Part C.) Stimulating dinner party conversation! But valuable.
Get your information from a reliable source. Here are some resources: Medicare.gov, National Council on Aging, and Next Avenue on Medicare.
Get and stay healthy. Take your health into your own hands and see your doctor for a physical. Challenge yourself to improve your vital numbers every year. Walk 10,000 steps a day. Quit smoking. Work with a nutritionist. Do whatever you need to improve your health and as a result, possibly reduce your health care expenses.
The saying goes that if you have your health, you have everything. If you have your health and your wealth (because you planned wisely and had enough to cover any health expenses), that’s even better.
