BMO Family Office
Health care is always a timely topic. Right now, we’ve noticed a lot of concern related to health care in retirement. It’s an essential component of an overall wealth management plan. In many cases, it’s the number one concern among pre-retirees as they work through their financial planning.
To get a better sense of the importance of understanding the unique requirements of your retirement health care planning, we recently hosted an online discussion with two experts on the subject:
Following is a summary of their presentations.
According to Stahl, while about 80% of individuals say they’re concerned about funding retirement health care, only 56% have done the work of factoring in the costs. Part of the disconnect involves understanding the intricacies of Medicare.
As Stahl noted, there are two primary Medicare coverage models: Original Medicare, the choice of about two-thirds of retirees, and Medicare Advantage Plans.
Original Medicare. As Stahl explained, the most common plan essentially consists of Parts A and B: hospital insurance—which includes hospital stays, hospice care and home health care—and medically necessary services, which covers certain physician services, outpatient care and preventative services. That means there's no private health insurance option to use in lieu of Medicare.
Because there are some gaps in Medicare coverage, such as hefty deductibles for hospital admissions, many retirees will supplement it with a Medicare Supplemental Insurance, also known as Medigap. If you receive care from physicians, for example, Medicare would cover 80% while Medigap would cover the remaining 20%.
Prescription drug policy. Also known as Part D, you would also obtain this coverage through a private insurer.
Medicare Advantage Plans. Also known as Part C, are another way to receive your Medicare coverage. These plans are offered by private health insurance companies commonly through an HMO or PPO. Part C provides a (usually regional) network of physicians . Some retirees accept this restriction for the cost savings. “As long as you stay in that network you get pretty robust coverage,” Stahl said. “But if you go out of your network, that coverage is significantly less and therefore can get much more expensive.”
Calculating Medicare costs
Most people pay the standard monthly premium for Part B coverage ($144.60 in 2020). If you make more than the preset income limits, however, you’ll pay more for your premium. That added premium amount is known as an income-related monthly adjustment amount (IRMAA). A critical factor to keep in mind, Stahl said, is that Medicare uses your income from two years prior to calculate your costs. For 2020 enrollees, that means Medicare uses your 2018 income as the basis.
“That’s a bit challenging, because 2018 might have been the peak of your career,” Stahl said. “If you're retiring in 2020, a lot of people say, ‘Well, wait a minute. That was the peak of my earnings career. Now I'm retired in 2020 and my income has dropped.’ ”
You do have the option, Stahl said, of appealing your IRMAA and using your current income to calculate your Medicare premiums.
Stahl noted that on average, a retiree can expect to pay about $6,300 a year on Medicare. That figure can vary greatly based on your health and your wealth. As Stahl noted, that $6,300 average includes Medigap coverage and out-of-pocket expenses for vision and dental copays. If you’re relatively healthy and don’t anticipate spending nearly $2,400 a year (the national average) for vision, dental and other non-covered items, that would lower your estimated cost.
Health is only half the equation; the more wealth you’ve accumulated, resulting in higher incomes, the higher your cost estimate. Your income can unexpectedly rise during retirement, due to issues like required minimum distributions (RMDs). That is, the minimum amount you must withdraw from your retirement accounts each year beginning at age 72.
Americans are living longer, and what you see happening is those required minimum distributions can get quite large in the upper ages in particular,” Stahl said.
Finally, there’s the fact that Medicare doesn’t cover long-term care, which can be a significant expense (not to mention a burden on family members).
Timing is everything
Stahl pointed out that when you plan to retire is also an important part of the retirement health care calculation. Unless you meet certain criteria, such as collecting Social Security disability, you're not eligible for Medicare until you're 65 years old. So, if you plan to retire early, you’ll need to budget for private coverage as part of your overall wealth management plan.
On the flip side, if you plan to continue working past age 65, you may not have to immediately enroll in Medicare. Again, that’s provided you meet certain requirements, such as having group health care coverage in a company with at least 20 employees. Otherwise, as Stahl explained, you may face onerous penalties for late Medicare enrollment.
“What you want to do is calculate your cost, get that number into your financial plan, and personalize it based on your health and wealth.” Stahl said.
A retirement health care tool
Along with the fact that Medicare impacts decisions around your financial planning, the factors outlined above make it clear why it’s important to understand your unique retirement health care requirements.
"Longevity and health are the keys to help you plan for life and plan for all the goals in your financial plan,” said Genivity’s Heather Holmes. “But without understanding your personalized needs around these areas, it's hard to get your plan right.”
Genivity’s HALO (Health Analysis and Longevity Optimizer) tool lets individuals complete a health retirement assessment, including sections on your lifestyle, health history and goals. It produces a comprehensive, personalized report that details the different costs that factor into your financial plan, including extended care projections—an important consideration given that Americans are living longer.
Through Genivity’s partnership with BMO, your BMO Wealth Management adviser can provide you with access to HALO. The assessment will be shared with your adviser (and only your adviser) to help you develop a plan based on your estimated future long-term health care costs.
“Once you have the information, you and your adviser are better able to protect your assets based on longevity,” Holmes said.
Life takes all sorts of twists and turns, so predicting how your life in retirement will play out is difficult. But proper planning can help provide insights to both understand and better prepare for the potential financial implications of your retirement health care down the road.
Contact your BMO advisor, or click here to contact us, for exclusive access to the HALO assessment that includes their personalized longevity and healthcare costs planning report.
Stay on top of the latest news and insights from BMO Wealth Management