There is a lot of uncertainty with healthcare lately, but two trends will likely continue: It will continue to get more expensive and you will continue to be responsible for more and more of the costs. Even with Medicare, it is estimated that the typical retiree will need between $200,000 and $400,000 to pay for health expenses during retirement. With that in mind you should seriously consider using a Health Savings Account (HSA) to help fund your retirement health expenses. You might be using one now, but if you’re like most, you’re not using it to its full potential. Let’s change that.
What is an HSA?
An HSA is a tax advantaged medical savings account available to people enrolled in high deductible health plans. Think of it as an IRA for your medical expenses. Unlike IRAs, however, HSA money is triple tax free: going in, as it grows and coming out. That is a huge advantage. The only caveat is that you need to spend the money on qualified health expenses or you’ll pay taxes and a penalty. The list of qualified expenses is rather long and even includes things like long-term care insurance premiums. Here are a few quick facts on HSAs:
- Contributions are tax deductible.
- The assets in the account grow tax free.
- Withdrawals for qualified medical expenses are tax free.
- If you take the money out for non-qualified expenses, you will pay taxes and a 20% penalty.
- Unlike FSAs, HSA dollars are not “use it or lose it.”
- Contributions can be made by either you or your employer.
- 2017 annual contribution limits are $3,400 for an individual and $6,750 for a family.
- Those over age 55 can make an additional $1,000 catch-up contribution each year.
- Money in the HSA can be invested in stocks, bonds and mutual funds.
A few things change at age 65…
- Distributions after age 65 are never subject to a penalty, even if not spent on qualified medical expenses. For non-qualified expenses just pay the taxes and use the money for whatever you want.
- At 65 you can pay for all Medicare premiums except Medigap with tax free HSA distributions.
- Once you enroll in Medicare, you can no longer make contributions to an HSA, but you can continue to use the existing money in your HSA.
Your best strategy
HSAs are growing in popularity, but they are not being used to their full potential. Because of the HSA triple tax advantage (in, out and during), the money should be invested for growth and allowed to compound as long as possible. Instead, here’s how most people use their HSA: 1) Add some money, 2) Leave the money in a no risk/no return money market, 3) Use the money as soon as they incur a medical expense.
Here’s how you should use your HSA: 1) Contribute the maximum amount allowed each year, 2) Invest the money in stocks, bonds and/or mutual funds, 3) If possible, pay for your current medical expenses out of pocket and allow your HSA money to grow until you retire. By doing that you are getting the most bang for your buck and creating a pot of money for retirement that can be used tax free for medical expenses or for anything else as long as you pay the tax.
Have you ever wondered what it would be like to live in one of those newfangled senior living facilities that are popping up all over the place? I was curious too. So I moved into one. I have a friend whose company owns a number of these retirement centers and they had just finished building a new one called Aksarben Village in Omaha. Since it was new and not yet full, I asked him if they had room for a temporary resident. He pulled a few strings and before I knew it my name was on the door of room 217, I was getting my hair cut at the in-house salon and I was sitting down to meals with my fellow residents. How did it go, what are these facilities like, what are the pros and cons of assisted living and what can you learn from the experience if you ever need this type of care for yourself or a loved one?
Who’s the new guy?
“Hi, I’m Pat,” she said as I sat down beside her for lunch. She was friendly and had that gleam in her eye that immediately puts you at ease. She quickly introduced me to the others at the table, including Dick, Kris, Martha, Dee Dee and Alice. We spent that first meal talking and laughing and I got to know a little bit about each one. I heard about kids, pets, spouses and stories from back in the day. They knew I was writing an article about assisted living facilities, so I asked them what prompted them to move. Most gave two or three reasons, but a common thread throughout revolved around health.
There aren’t many certainties in life, but this is one: Your health is going to change. Your mental and physical abilities will look different at 70 or 80 than they did at 50 or 60. Sometimes the changes are minor and sometimes major, but about two thirds of us will need help coping with those changes. In the past, as abilities diminished, your choice was either a curtailed lifestyle (e.g. no driving, less cooking, etc.) supplemented by whatever assistance friends and family could provide or a move into a nursing home facility that was very expensive and provided way more care than you needed.
The basic idea of the new retirement living options is that they broaden the spectrum of help available. They provide a base level of services that cover issues most of us deal with as we age and then provide a laundry list of à la carte services so that people get help where needed while still maintaining their lifestyle and independence.
I learned all about these different levels of care during the check in process. At one end of the spectrum are independent living facilities. As the name implies, residents basically live independently (similar to renting an apartment), but the facility provides services like housekeeping, home maintenance, some meals, security and a number of other amenities.
Assisted Living, where I stayed, is next on the spectrum and provides much more involved care. You have your own apartment (equipped with things like zero entry showers and an emergency response system), weekly housekeeping, laundry services, access to onsite medical personnel, transportation to outings or appointments and three restaurant style meals per day in the dining room. In addition you have a personalized care plan based on an assessment completed at admission and then updated every 30 days. This personalized care includes things like medication management, breathing treatments, bathing, grooming, using the restroom, mobility, dressing, safety checks and help with things like the phone or email.
People who need more intensive or specialized care—such as those suffering from dementia or Alzheimer’s disease—can move into either a memory care facility or a nursing home. These facilities have specially trained staff and caregivers who are there to provide care 24 hours per day.
Many facilities (including where I stayed) recognize that people may need all three of these levels of care at some point, so they build them together into a sort of senior living campus. This allows a person or his/her spouse to move up to the next level of care when needed.
Amenities and Activities
These new facilities are definitely not like nursing homes of old. For example, where I stayed there was a large movie theater complete with popcorn machine and iPad controls that are connected to cable, Netflix and just about every other streaming service you could imagine. There was a banquet room, private dining rooms for when family comes to visit and a full service kitchen with chefs who were more than happy to take any special requests. There is also a workout room, a physical therapy room, billiard room, beauty/barber shop, chapel, library and an activity/craft room.
Residents put these facilities to good use. Each month the lifestyle coordinator releases a new activity calendar containing church services, workout classes, movie nights, political discussion groups, cooking classes and trips to places like museums, stores and local restaurants. Partnerships with community organizations provide additional benefits. For example, the Omaha Public Library rotates new books each month through the library based on resident requests and Hy-Vee does free delivery of groceries each week to any resident that orders them.
As you can probably imagine, these services are not cheap. The more care a person needs, the more expensive it gets. Independent living averages about $2,500 per month nationwide. Memory care and nursing home care are higher, averaging $6,000-$7000 per month. Assisted living falls somewhere in the middle with the median cost of care nationwide around $3,600 per month. Studio apartments where I stayed start at $3,500, but you could spend much more if you wanted a 2 bedroom, 2 bath unit. The monthly care plan can add additional costs to assisted living. Where I stayed, services are given a point value and any additional costs are based on the point total. For example, someone who needs 2 medication reminders per day as well as assistance with shaving and getting dressed would have a point total of 14, which would cost about $285 extra each month.
How to pay
Except in very limited circumstances Medicare does not cover any long-term care costs. Medicaid does, but to qualify, you basically need to be both sick and poor. Even then, the amount Medicaid provides is limited, so most private facilities have a minimal number of beds set aside for Medicaid residents. Because of that, those who want to live in these facilities will need the means to pay for it, which can be a major obstacle. Most of the people I talked to were covering the costs from a combination of personal savings and payments from long-term care insurance. Those policies can be expensive, but one month of care will usually cost more than one year of insurance premiums, so having a policy can make financial sense if you end up needing it. In some cases, adult children were also helping to cover some of the costs so they could have peace of mind that mom and dad were well cared for.
Pros and Cons
One of the first people I met when I arrived at Aksarben Village was Colleen. She is suffering from mild dementia which affects her short term memory, but was otherwise healthy, sharply dressed and a kick to talk with. She has six kids and we spent the better part of an afternoon talking about each of them. On the last day of my stay, I actually got to spend some time visiting with one of her daughters, Sara Wachter. Her perspective gave me some great insights into the pros and cons of assisted living facilities.
Prior to moving into assisted living, she told me that her mom’s dementia was causing problems like social isolation, missed medications and missed meals. Even with a big, supportive family the memory loss was creating issues that were impacting Colleen’s health, safety and lifestyle. Their gerontologist said it was time to make a move so they started exploring options. “Mom grew up in this part of town, so it was a good fit,” Sara said. It wasn’t without challenges, however. Finding out she had to leave her home was initially a shock, but hearing the news from the gerontologist gave it more weight and took the pressure for that decision off Colleen and her family. Giving up her car was also tough, but since the facility had transportation the kids thought it was for the best. Expenses were also a concern, but Colleen’s mother lived to be 104 and was in a nursing home, so Colleen purchased a long-term care policy years ago which has helped with the costs.
As Sara and I talked, we saw her mom come down to the front lobby and start chatting with other residents. Dick Loneman, the driver at the facility, was getting ready to take them for an afternoon at the Joslyn Art Museum.
“Mom has thrived since moving in here,” said Sara. “The things she couldn’t take care of were all of a sudden being taken care of by someone else. Now she’s free to enjoy life and doesn’t have the responsibility for all those day to day things that had become so challenging for her. It’s less stressful for us too, because we know she’s in good hands.”
Have you ever bought anything that totally made sense at the time, but now you don’t really want (or need) it? The treadmill that now doubles as a clothes rack. The timeshare you bought after a high-pressure sales pitch. The Franklin Mint plate collection.
For some people life insurance falls into this category. It made perfect sense at the time. With a growing family and people relying on your income, you needed a plan just in case the unexpected happened.
But then, thankfully, the unexpected didn’t happen. The kids grew up and moved out. The value of the nest egg went up and debt was paid down. Now, with retirement on the horizon, the “income replacement” argument for life insurance is no longer quite as compelling. At this stage in life you’re more concerned with how to pay for your healthcare and long-term care. Wouldn’t it be nice if there were a way to swap your existing life insurance for some long-term care insurance? Now you can.
How it works
If you have a permanent (e.g. whole life) insurance policy that you no longer want, one option is to cash it in and quit paying the premium. A better option might be to use the cash value in that insurance policy to buy a new, paid-up life insurance policy with a long-term care rider.
How does life insurance with a long-term care rider work? Just like with your old policy, the new policy will act as life insurance if you die. Where it differs is that it will also give you some multiple of the face value of the policy in long-term care benefits. For example, if you bought a $50,000 policy, the rider might provide $150,000 in long-term care benefits. These policies also typically have an option that allows you to terminate the policy for a full refund if you decide you don’t want it.
In other words, these can be win-win-win policies. In the above example, if you need care, you have $150,000. If you die without needing care, your heirs get the $50,000. If you decide you don’t want the policy, you can get a full refund.
I have had a number of clients use this strategy to repurpose an old life insurance policy into something more useful for their retirement years. If it sounds like something that might work for your situation, give me a call and I will connect you with my long-term care partner. She is licensed in all 50 States and would be happy to answer questions.
Have a great 4th!
“Should I buy long term care insurance?” I get asked that question at least once a week. As you prepare for retirement, I’m guessing that question has crossed your mind a time or two as well.
Well, you’re in luck. I do my best to provide useful resources for my readers (who, like those in Lake Wobegon, are all strong, good looking and above average), so I called one of the country’s foremost experts on long-term care and asked her if she’d be willing to spend some time educating us on the ins and outs of this important area.
She agreed and we scheduled a conference call for June 12 at 11:00 a.m. Central Time. You’re all invited to attend. The first part of the call will be informational and then we’ll reserve time at the end for Q&A. The purpose of the call will be to provide you with information and options. It will not be a sale pitch.
What we’ll talk about
- Preparing for when your health changes.
- How does long term care work?
- What is the range of care options available today?
- Who should consider buying a policy?
- How do Medicare and Medicaid factor into your decision?
- What types of things should you look for in a policy?
- When is the best time to apply?
- How can you protect yourself against the rising cost of care?
- How much will a policy cost?
- What percentage of people will need some form of long term care (spoiler alert: 50 percent of men and 75 percent of women)
Call in details
- The system I’m using has a limit of 96 people per call. Access will be on a first come basis.
- The information is free. Your only cost will be whatever your phone company charges you for a normal long distance call (sorry, but I can’t pick up the phone bill for everyone)
- The call will be June 12 at 11:00 a.m. Central. Call in 5 minutes early so we can get everyone situated and start promptly at 11:00.
- The call in number is (712) 451-6000.
- After calling the number, you will be prompted to enter your Participant Access Code. Enter 256869# and you will join the rest of us on the call.
- If you plan on sitting in on the call and would like a reminder, just email me at firstname.lastname@example.org and I’ll try to send out a reminder email a few hours before the call.
If you have a specific question you’d like to make sure we cover, email it to me sometime over the next week or so at email@example.com. Thanks and I hope to see as many of you as possible on the call.
Quick Note: The material on the call will be for general purposes only. For specific legal, financial or insurance advice you should contact your attorney or financial adviser. You can also contact the guest speaker on the call (Marlene Lund) at 402-896-9193 if you have specific long-term care questions. FYI, I refer clients to Marlene and she and I work together to help them with their long-term care needs. Because of that, if you end up doing business with Marlene, I will likely receive some sort of compensation. I just wanted to make that totally clear. Thanks.
When entering retirement, it’s common to simplify your budget as much as possible by cutting all unnecessary expenses. Nix the expensive work wardrobe. Downsize to a smaller house. Stop making IRA and 401(k) contributions. Cancel your life insurance policies. Hold on. Not so fast. That insurance might come in handy during retirement.
Income replacement is the primary purpose of life insurance and since most retirees aren’t working, having life insurance can seem like a solution in search of a problem. But insurance can serve other purposes as well. Below are five reasons you may want to keep your life insurance during retirement.
It’s not a given that retirees don’t need income replacement protection. More and more people are choosing to work part time during retirement in order to supplement their income. If you choose to work and your spouse is counting on that income, life insurance can be a good way to replace it if something happens to you.
Life insurance can also help replace pension income that stops or is reduced when the pension holder dies. Ditto for Social Security . When one spouse dies, the surviving spouse receives the higher of the couple’s Social Security checks and the lower benefit stops. In all of these cases, life insurance can be an effective way to protect the income of the surviving spouse.
Tax Free Withdrawals
If you have a permanent life insurance policy (such as whole life) that has built up cash value over the years, you can use that cash value in a variety of ways. First, you can use it to make premium payments on the policy. This can be a good way to keep the insurance while still cutting your expenses.
You can also withdraw a portion of the cash value, which is not taxable as long as you take out less than what you originally paid in. Any amount over that will be taxed. Borrowing against the cash value is another common way to access the funds. Rather than paying the money back, you can choose to have the loan plus any accumulated interest subtracted from the death benefit after you die. The proceeds from the loan are not taxed as long as the policy does not lapse or get surrendered before the loan is paid back. Before withdrawing or borrowing against the cash value in your policy, meet with your adviser to see how those actions will affect your taxes, premium payments, and death benefit.
Chances are good that you’ll leave more than just money to your heirs. Maybe you have a family business or a vacation home that has been passed down over the generations. If you have three children, but only one is interested in taking over the business, how do you treat everyone fairly? Life insurance can be a great way to provide liquidity to your estate so you can pass the business to the child that is interested and give the remaining children an equivalent amount in cash.
Under current tax laws, the top federal gift and estate tax bracket is 35% and the exemption is a little more than $5 million per person. Basically, with a little planning, a couple could avoid estate taxes as long as their estate was worth less than $10 million. That means the vast majority of people do not need to worry about the estate tax. However, the current laws are scheduled to “sunset” at the end of 2012 and will revert to the previous 55% tax and $1 million exclusion. Unless changed by Congress, the new law will result in many more people having a potential estate tax liability. Life insurance can help protect against that liability and preserve an estate for heirs or charitable giving.
Long-Term Care Insurance
As you move into retirement, you may be in a position where you’re less concerned about life insurance than you are about long-term care insurance. If you have a cash value life insurance policy that you no longer need, you might want to consider converting that into a life insurance policy that has a long-term care rider. You can accomplish that by doing a tax free transfer (a 1035 exchange in industry lingo) of the cash value from your current policy into the new policy.
The new policy with the long-term care rider will provide you with several options. As discussed previously, you can always withdraw what you put into the policy if you end up needing the money. If you choose to keep the policy in force and die without needing long-term care, the insurance company will pay a death benefit to your heirs. If you need long-term care, however, you can use the policy to help cover those costs instead of using it as life insurance. In short, this type of policy gives you added benefits and flexibility.
While not appropriate for everyone, life insurance can play an important role during retirement. Work closely with a trusted adviser to see if maintaining your policies makes sense for you.
Photo by Russ Morris. Used under Creative Commons License. I originally published a version of this article at www.fpanet.org.
One of the biggest obstacles to retiring early is health care. If you want to retire at 62, but don’t become eligible for Medicare until 65, you have a three-year window where you need to bridge the gap between your employer’s coverage and Medicare. Traditionally, that has meant either going without insurance (not a good idea) or paying for an individual policy (mucho deniro or not available due to pre-existing conditions).
The new health care law has elements that could make it easier to bridge the gap between employer coverage and Medicare, thus making early retirement a more viable option. The law phases in over time, so I’ll discuss the options available to you between now and 2014 and those after 2014.
Between now and January 1, 2014
In the short term, the law makes $5 billion available to employers to spend on insurance for employees who decide to retire early (visit www.errp.gov for more info). The drawback here is that your employer needs to offer retirement insurance benefits, which most don’t.
If you’re willing to buy an individual policy to bridge the gap, but don’t qualify due to a pre-existing condition, the new law also has a pre-existing conditions insurance plan. Visit HealthCare.gov to get details for your state and information on how to apply.
After January 1, 2014
Both the early retiree and pre-existing conditions programs mentioned above expire at the end of 2013. What replaces them? Starting January 1, 2014 insurers will no longer be allowed to deny coverage based on pre-existing conditions, so you can shop around with private insurers regardless of your health. If you want to retire early and still can’t find affordable coverage with a private insurance company, states will have “exchanges” where anyone can buy health insurance.
So if you plan on retiring early, it looks like you’ll have a few more options for health coverage. Work with a trusted adviser to see if these options are right for you.