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.”
Quick Note: Sorry things have been quiet around the site for a few weeks. I was on vacation with family and friends and prior to that I was scrambling to get things wrapped up at the office. I’m home and caught up, so it’s back to regularly scheduled programming. Thanks for your patience.
Being on the road made me think of a question that clients often ask me:
“Does Medicare cover me when I travel?”
The answer, of course, depends. And it would be bad enough to get sick or injured on vacation without also finding out that Medicare won’t cover the expenses, so let’s take a look at whether your Medicare will travel with you.
What type of Medicare do you have?
Coverage varies depending on whether you have original Medicare or Medicare Advantage. Original Medicare is just Parts A and B (hospital and outpatient services) supplemented with a Medigap policy. Medicare Advantage is when you have Parts A and B and then also purchase Part C, which is coverage provided by Medicare approved third-party health insurance companies. Each of these types of Medicare works differently depending on where you travel.
Where are you going?
Original Medicare is extremely flexible within the U.S. (which includes all 50 states as well as Washington D.C., Puerto Rico, U.S. Virgin Islands, Guam, American Somoa and the Northern Mariana Islands.). There are no networks or preferred providers with original Medicare, so you can get care at pretty much any facility that accepts Medicare.
Medicare Advantage is a bit less flexible. Coverage is most comprehensive if you get care within the network of the private health insurance company that is providing you Medicare Part C. Generally speaking, the closer you are to home, the better your coverage will be. Having said that, if you’re having a medical emergency you can use your Part C pretty much anywhere in the U.S. and it will be covered. Call your insurance company if you’re unsure if a particular provider is “in network” or “out of network.”
Except in very limited circumstances, neither type of Medicare (original or Advantage) will provide coverage while you’re traveling outside the U.S. They may cover certain services while you’re on a cruise ship or while you’re traveling across Canada on your way to Alaska, but that’s about it. Some Medigap policies cover emergency medical services while traveling abroad, but there are limits to the coverage. They generally pay for 80% of covered services after meeting a $250 deductible with a lifetime maximum of $50,000. Bottom line—if you’re planning a trip abroad, it’s best to buy a separate travel insurance policy with generous health coverage. It’s also a good idea to get a policy that includes evacuation insurance. As you might imagine, it would be very expensive to pluck you from the bottom of the Grand Canyon or from the rain forest in Costa Rica if you are sick or injured. Those costs can run into the tens of thousands of dollars and neither Medicare nor Medigap covers the cost of a medical evacuation.
So before you hit the road, do a little research to make sure you’re covered and your trip will be a lot more enjoyable. Bon Voyage!
Congress just passed a law that made some changes to Medicare so I wanted to give you a quick summary of those changes and how they might affect your retirement plans.
Doctor Pay. The law repeals the physicians payment cut that had many doctors seriously considering whether they should stop accepting Medicare patients altogether. The law also institutes annual payment increases to doctors for certain Medicare services. This is good for Medicare patients because it will increase the likelihood that they will continue to have access to their doctor of choice.
Health Care Quality. The law also instituted new quality measures for doctors and hospitals which reward them for providing high quality care. This is obviously another plus for those on Medicare.
Identity Theft. If you’re currently on Medicare, you probably raised an eyebrow when you first got your Medicare card and saw your Social Security number printed on it. This obviously opens the door to identity theft if your card is lost or stolen. The new law stipulates that all new cards must come without Social Security numbers printed on them by April 16, 2019 and existing cards must be reissued within four years after that.
Means Testing. As the financial difficulties of Medicare and Social Security become more acute, one of the first “fixes” that Congress will likely reach for will be some form of means testing. This is already starting to happen in Medicare. For example, the law increases the amount that high-income beneficiaries will pay for Part B (doctor’s insurance) and Part D (prescription drug coverage).
To understand how premiums will increase, we need to understand how the premiums are calculated. Basically, the government calculates an overall premium based on the cost of the program and then they pay part of that premium and individuals pay the other part. Your income level will determine how much of the premium you will be required to pay.
Most people currently pay a premium of $104.90 per month for Medicare Part B, which equates to about 25% of the premium cost. High earners, however, pay an Income Related Monthly Adjustment Amount (IRMAA). The higher your income, the more you pay. This has been the case for many years now, but the new law reduces the income limits, thereby subjecting many more people to higher premiums.
Here’s what people are paying currently:
Less than $85,000
$85,001 to $107,000
$107,001 to $160,000
$160,001 to $214,000
More than $214,000
And here is how the income limits will adjust:
Less than $85,000
$85,001 to $107,000
$107,001 to $133,500
$133,501 to $160,000
More than $160,000
Notice that many more people fall into the “high income” category and will thus be responsible for a larger percentage of the premiums. It’s difficult to put a specific dollar value on these increases, because we don’t yet know what the premium costs will be in 2018, but here are two things we do know: 1) the premiums will be higher than they are now, and 2) those with higher incomes will be required to pay a larger percentage of the premium. I have seen some estimates that a person in Tier 4 or 5 might pay around $3,500 more per year ($7,000 per couple) than they would if they were in Tier 1 or 2.
Are there ways to avoid these increases? Yes! The increases won’t happen until 2018, but they will be based on your Modified Adjusted Gross Income in 2016 and beyond. Those who are retired (or close to it), should keep that in mind. Your adjusted gross income is made up of things like wages, taxable interest, dividends and distributions from IRAs. During retirement, you can control several of those things. When deciding which accounts to pull from first, how much to pull from your IRAs or whether or not to work part time, consider how those decisions will affect your income and whether or not that income is enough to bump you up into a higher Medicare bracket. If so, it might be wise to forgo part-time work or delay distributions from IRAs until the following tax year.
I know Medicare discussions can be a little dry, so I’ll leave you with a fun photo from over on our Facebook Page:
“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.
It’s no secret that prescription drug costs can put a big dent in your retirement budget. What you may not know is that the cost of those drugs can vary (sometimes drastically) based on which pharmacy fills your prescription.
The assumption is that drugs have set prices and every pharmacy charges the same price for the same drug. The reality is that pharmacists charge what they want. If you have a high deductible health plan or you’re in the “donut hole” on the Medicare Prescription Drug plan, going to the wrong pharmacy can mean much higher out-of-pocket costs. Until recently, there was no tool to compare what different pharmacies were charging for a certain drug in your area.
Doug Hirsch and Scott Marlette have changed that. They were early employees at Facebook until eventually moving on to pursue other ventures. One day Doug had a prescription that he needed to have filled. The price of the drug at his regular pharmacy seemed really high, so he shopped around and found that the cost varied significantly. Long story short, they figured out a way to create a huge database of drug prices from all over the country and launched a new website called GoodRX where people can enter a drug name and their location and get a comparison of what pharmacies are charging.
To get an idea of the diversity of prices, I went to GoodRX and compared prices on a variety of different drugs. For some drugs, the prices were very consistent from pharmacy to pharmacy. For others, there was a huge difference. For example, I looked up a variety of drugs used in the treatment of colon cancer. The high and low for my area are listed below.
Leuprolide—High: $436.17, Low: $188.52
Taxotere—High: $640.61, Low: $275.12
Flutamide—High: $50.14, Low: $29.20
As you can see, those are some pretty wide swings. If you visit the site, you’ll notice that there are coupons available for many drugs and there is also a mobile App available so you can check prices while you’re actually in the pharmacy.
Have a great weekend!
Photo by Wil Taylor. Used under Creative Commons License.