The Health Scare Lurking in Your Retirement Plan
by Suze Orman
In terms of planning for retirement, there's a dangerous good news/bad news dynamic threatening to undermine your strategy.
The good news is that we're living longer than any previous generation. A 55-year-old man today has an average life expectancy to age 79; a 65-year-old woman today has an average life expectancy to age 83.
Bad Odds for Health Coverage
And now the bad news: Living longer is expensive.
A new study by the Employee Benefits Research Institute (EBRI) estimates that in 2018 a 65-year-old couple that doesn't have any employer-provided retirement health benefits will need more than $300,000 to pay for their out-of-pocket health care costs for the rest of their lives.
I want to be clear: that cost is over and above what Medicare will cover. Actually, that $300,000-plus price tag is the EBRI's estimate of the median expenses for a couple, including drug costs. The EBRI worked up their estimates using a Monte Carlo simulation, and for a couple to have a high probability (90th percentile) of covering their out-of-pocket health care costs pushes the bill above $1 million.
That's asking a lot of any retirement stash. While reform of the health insurance system is getting plenty of attention from both presidential candidates, there is a big difference -- and time lag -- between platform positions and the passage of legislation.
An Interim Health Insurance Plan
Rather than just sit on the sidelines and wait to see how this plays out over the coming year, there's a move you can make today that can protect you now, possibly lower your out-of-pocket costs this year, and give you the opportunity to invest in a tax-deferred savings account for future health costs. Regardless of what reform may be coming down the road, having the ability to save money in a tax-deferred account (it can even be tax-free if you follow certain rules) is never going to lose its value.
What I'm talking about is switching to a High Deductible Health Plan (HDHP) that you then pair with a Health Savings Account (HSA). Given that we're about to head into the "open enrollment" period where employers make you choose your benefit plans for the coming calendar year, it's increasingly likely you may have an HDHP/HSA option in this year's benefit package.
The HDHP/HSA has only been around since 2004, but already more than 6 million Americans are enrolled -- both through employers, and via individual plans as well. It's expected that more employers will be pushing this alternative for the 2009 benefit year.
Offsetting Higher Deductibles
If you're in good health, opting for AN HDHP/HSA can be a cost-effective way to protect yourself and save money.
Let's walk through the mechanics of how this works. First, you need to be willing to take on a higher annual deductible in your basic health insurance plan; for 2009, that means a minimum deductible of $1,150 for an individual and $2,300 for family coverage. In return for taking on the financial responsibility of those high deductibles, your annual premium will be lower.
Of course if you or a family member ends up in need of care, your savings will be offset (or exceeded) by the higher out-of-pocket deductible cost. And the HDHP also will typically have a higher annual maximum out-of-pocket cost than a traditional plan. For 2009, the maximums are $5,800 for an individual and $11,600 for a family.
Tax-Free Health Savings
That's a lot of money to be on the hook for, but the HSA part of the equation will help.
Once you sign up for the HDHP, you then become eligible to set up your own personal Health Savings Account. If the health insurance is offered through an employer you can make pre-tax contributions from your paycheck. If you pay for your own private insurance, you can claim your HSA contributions as a tax deduction. Either way, you've lowered your taxable income for the year.
In 2009, the maximum HAS contribution for an individual will be $3,000. For families it's $5,950. Anyone over 50 years old will be allowed to contribute an additional $1,000. (Some employers may even contribute to your HSA account.)
The money you set aside in an HSA can then be used to pay your out-of-pocket health expenses; you can withdraw the money at any time and with absolutely no tax bill if the money is indeed used to pay for medical costs. But here's where it gets extra interesting: You can also just leave the money untouched and have it grow tax-deferred. Think of it as a Health IRA that allows couples to stash away an extra $5,950 today for their retirement years. And this bears repeating: If you do indeed use the money at any time for a medical expense, there's no tax bill on the withdrawal.
Tax Implications for Non-Medical Withdrawals
But you can also use the money for non-medical expenses, too, though there will be an IRS bill.
Make a withdrawal for a non-medical purpose before you're 65 you'll be hit with a 10 percent penalty as well as having to fork over income tax on the withdrawal amount. But after you turn 65 there's no 10 percent penalty; all you'll owe is income tax -- just like with a traditional IRA.
When you leave a job, voluntarily or not, you retain control of your HSA savings. In fact, if you're laid off and choose to keep paying for your former employer's health coverage through COBRA, you can tap your HSA to cover your premiums.
Make Sure the HSA is Right for You
An HSA account is just another breed of savings account; in most instances the money will be invested in a low-risk bank account, though you may have the option to choose among stock mutual funds, too. Be careful what you choose, though -- if there's any chance you'll need to tap the account to cover medical costs that may crop up over the next few years, that money belongs in a low-risk savings account.
Before you sign up, find out what the going rate is on the account. While the opportunity to invest pre-tax money and have it grow tax-deferred is a great incentive, you want to make sure you're earning a decent rate on your money. If you're shopping for your own private coverage, you have the ability to keep looking for the best offer. Check with your insurance agent or eHealthInsurance.
Next, size up the ongoing nuisance costs that seem to be all too common with HSAs: There's often a one-time setup fee that can be $25 or more, and many plans then levy a monthly service charge that can add up to $50 or more a year. You can also be hit with a service fee of a few dollars every time you tap the account to pay a medical bill. You obviously want to shop around for the lowest fee option. The less you have to pay, the healthier your account will be.
