This quarter’s education series is Financial Considerations Upon Retirement. The first post addressed cash flow and taxes. Now we’re turning our attention to one of the biggest worries in retirement — the cost of healthcare and other types of insurance. Insurance can be a large expense in retirement, but it’s a necessary part of protecting yourself to live out your retirement years with ease of mind.
The options discussed are things to consider as you’re making the transition into retirement. Planning ahead for healthcare and insurance can help you work toward a financially strong and enjoyable retirement.
Will you retire before age 65 and need health insurance?
It’s common for people to retire before they’re eligible for Medicare (age 65 unless a qualified exception). If you have employer-provided health insurance and retire before 65, you want to thoughtfully consider your health insurance coverage. If you’re married and on a different plan than your spouse, make sure you know the eligibility options under his or her plan. You will also want to consider additional insurance needs, such as vision and dental coverage, which are separate from other policies.
If you are enrolled in the Health Insurance Marketplace, specific income levels might be eligible for the Premium Assistance Tax Credit. This could limit the amount spent on premiums to 8.5% of your household income. Through careful financial planning and meeting certain income requirements, you might qualify for these subsidies. Professionals such as financial planners, accountants, and health insurance consultants can help you navigate these opportunities.
Will you have to change insurance upon turning 65 or retiring from your employer?
The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a law that allows employees of private sector companies with at least 20 employees to stay on their employer’s health insurance plan past retirement. It’s important to note that COBRA generally only lasts 18 months for retirees, and it can be expensive.
As a part of the 2010 Affordable Care Act, the Health Insurance Marketplace provides health insurance shopping and enrollment services for a variety of insurance needs and budgets.
Are you contributing to an HSA?
HSAs are powerful “triple tax benefit” health savings accounts available with high-deductible health plans. They are beneficial before and after retirement. The tax benefits are:
- Contributions reduce taxable income,
- Investment growth is tax-free, and
- Qualified withdrawals for medical expenses are tax-free.
Contributions to the accounts can be used to pay for out-of-pocket medical expenses, or they can be invested. When retiring early, you can continue to contribute to an HSA if you are not yet enrolled in Medicare, you’ve maintained a high-deductible health plan, and you’re not someone else’s dependent.
Multiple strategies can be used with HSAs. They are some of the best tools for retirement medical expenses due to the tax benefits experienced now and later.
Will your MAGI exceed $91,000 (Single Taxpayer) or $182,000 (Married Filing Jointly)?
If your modified adjusted gross income (MAGI) exceeds the above income levels, you may be subject to Medicare Parts B & D IRMAA (income-related monthly adjusted amount) premium surcharges. In other words, if you have a lot of taxable income, you have to pay extra for Medicare. Whether you pay IRMAA in a specific year is determined by your income two years prior, and it adjusts annually. There is an appeals process if your financial situation has changed. Work with a tax professional, financial planner, and Medicare expert if you are trying to manage your income to avoid or reduce IRMAA.
Are you disabled?
People with disabilities may be eligible to qualify for benefits early. For example, you may qualify for social security disability. Or you may be able to withdraw from different retirement accounts early. Talk with a financial planner about the many options.
Has your need for life insurance changed?
Life insurance is meant to replace income in the event of premature death. Typically, policies are started when the insured is young with few assets to take care of those left behind. As you age and assets grow, the need for life insurance usually decreases. It is important to analyze the need for insurance and the cost of policies.
Are you concerned about funding long-term care?
Medicare and Medicaid help cover some medical expenses. But they may not cover long-term care events, such as skilled nursing care. Long-term care insurance helps cover those expenses.
Depending on your situation, obtaining a long-term care insurance policy is generally recommended from late 40s to mid-50s. You can eventually price yourself out of the policies if you wait too long. If you have long-term care insurance, it’s important to periodically review your policy to make sure it meets your needs.
The benefits of long-term care insurance go beyond numbers and can help family members with the emotional burden of making the decision for care for their loved one. LTC policies are more expensive than other types of insurance, and not everyone needs them. A fiduciary financial planner can give you an unbiased need analysis and then help get you connected to an independent insurance agent to meet that need.
With the help of professionals in their field of expertise, you can get coverage that meets your needs and make a plan that might help control the cost of insurance. Getting the help of a fee-only financial planner takes away any conflicts of interest or commissions. Flagstone is a fee-only firm. Our advisors put your best interests first. If you’re interested in discussing your options, contact us to see how we might help.