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5 Ways to Avoid High Retirement Health Costs

Follow these tips to calculate and save on future health care needs

By Robert Powell and MarketWatch

Much is made about what health care might cost in retirement. Indeed, studies suggest that a 65-year-old couple retiring today would need on average anywhere from $220,000 to $360,000 of their nest egg earmarked just for healthcare costs in retirement.

But the truth of the matter, as Medicare’s annual enrollment period gets underway, is that those costs might be even higher given a number of factors that could come into play in your household. What are they and what might you do to either avoid or trim higher-than-expected health care costs in retirement?


(MORE: Tips for Medicare's Tricky Enrollment Season


According to Paula Muschler, an operations manager as Allsup Medicare Advisor, a provider of Social Security and Medicare services for individuals based in Belleville, Ill., where you live, your income level, which plan you choose and your health can all play a role in what you end up paying for health care in retirement. “That’s why it’s critical to use the opportunity in both the years ahead of retirement and the months before you turn 65 to study your options,” she said.


“The health care landscape is changing rapidly and consumers face more choices and more responsibilities,” said Ceci Connolly, the managing director of PricewaterhouseCooper’s Health Research Institute, which provides intelligence, perspectives, and analysis on trends affecting all health-related industries. “That means educating oneself and staying current is more important than ever.”


Save for Health Care Costs Before You Retire


One way to cut or reduce your health care costs in retirement is to start saving for those expenses long before you retire. “For those with years before retirement, now is the time to save for health care,” said Muschler.


Others share that point of view. “If at all possible, proactively save for retiree health care expenses while active, said John Grosso, leader of Aon Hewitt’s Retiree Health Care Task Force, a Lincolnshire, Ill.-based consulting firm. He advised contributing the maximum amount to your tax-favored retirement accounts, such as your IRA, 401(k) and 403(b), while actively employed.

(MORE: Women: Get Real About Retirement Health Costs)


In addition, consider using a high-deductible health plan with a Health Savings Account (HSA). Grosso recommends contributing each year the maximum into an HSA, which allows tax-free savings and tax-free withdrawals for health care expenses.


Pre-Medicare, Grosso noted that retirees can withdraw funds from their IRA, 401(k), 403(b), etc., use them to fund the HSA and “wash out” the taxation so that these assets are never taxed, if used for qualified health care expenses. “This is something retirees need to take advantage of to secure a “federal health care subsidy” through the tax code,” he said.


By the way, only a small segment of seniors — 29 percent of women and 35 percent of men — set aside retirement funds for health care costs, according to Allsup’s research. “This can be critical because Medicare coverage can have significant out-of-pocket costs for beneficiaries,” she said. “Depending on the Medicare plans someone chooses, their premiums, deductibles and out-of-pocket costs can amount to hundreds or thousands of dollars a year.”


People, Muschler said, also should address health care planning during their retirement discussions with their financial planners. Just 29 percent of women and 27 percent of men do that today, according to Allsup research.


High Income Equals More Expensive



But if you are among that group, here’s what you can expect:


If you file your taxes as married filing jointly and your modified adjusted gross income (adjusted gross income plus tax-exempt interest income) is between $170,001 and $214,000, you’ll pay 40 percent more for your Medicare Part B medical insurance than if your income was $170,000 or less. Plus, you’ll pay an additional $11.60 per month on top of your plan’s Part D premium.


And if your income is above $428,000, you’ll pay more than three times for your Medicare Part B than the average American and another $66.60 per month on top of your plan’s Part D premium.



How to Avoid or Reduce Extra Costs


One way to mitigate costs is to revisit what’s called your Income Related Monthly Adjustment Amounts (IRMAA) determination, especially if you experience a big change with your income as you age, said Muschler. This refers to premium increases that Medicare charges beneficiaries who have income levels over income thresholds.


According to Muschler, IRMAA uses someone’s modified adjusted gross income from two years prior to determine if they have to pay the higher premium. “So, if you were working then and had income, for example, of $150,000 but have since retired and your income has dropped to $50,000, you could be charged the higher premium unless you seek an IRMAA reconsideration,” she said.


In addition to retiring or reducing your work income, other life changes, such as death of a spouse or divorce, may allow you to seek an IRMAA reconsideration and reduce your Medicare costs because of a reduction in your income, said Muschler.


Barry Picker, of Picker & Auerbach, CPAs, a Brooklyn, N.Y.-based accounting firm, said people with large retirement distributions can take the hit one year with a Roth conversion and reduce modified adjusted gross income in prior years. “Also, I believe that if you have a one-year jump (in modified adjusted gross income), say because one sold their residence at a large profit, you can appeal the increase. Plus, people may be able to manipulate income without reducing it by bunching income every other year. “That might save some money,” said Picker.


If you had a major life-changing event and your income has gone down, you may use the Medicare form, Medicare Income-Related Monthly Adjustment Amount—Life-Changing Event, to request a reduction in your income-related monthly adjustment amount.


Pick the Right Coverage and Plan


According to Blair, Medicare beneficiaries may want to enroll in additional coverage through private insurance plans since original Medicare (Part A and Part B) doesn't cover all health care costs or most prescription drug costs. These plans, said Blair, include Medicare Advantage (Part C) plans, Medicare Part D prescription drug plans and Medicare supplement (Medigap) plans.


“The type of coverage a beneficiary should enroll in depends on their own needs and budget,” said Blair. “For example, a beneficiary may be interested in a Medicare Advantage plan because it can come with additional benefits such as vision, dental, and/or hearing benefits,” he said. “These plans can also combine health and drug coverage into one plan with one monthly premium, which could be as low as $0 a month. The beneficiary would still be responsible for their Part B premium.”


On the other hand, Blair said a beneficiary could be interested in a Medicare supplement plan, such as the standardized Medigap Plan F, which is available in 47 states and the District of Columbia (not Massachusetts, Minnesota or Wisconsin).


Medigap Plan F, which generally covers all eligible health care costs after the beneficiary has paid for his/her premium, could be a good option for beneficiaries looking to get comprehensive coverage, Blair said. “It is important for beneficiaries to understand their options and select the right type of coverage for their individual needs,” he said.

Robert Powell writes about retirement issues for and produces the Retirement Weekly subscription newsletter. Read More
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