Published On: November 17, 2020
Written by: Ben Atwater and Matt Malick
As America figures out its election results, healthcare could prove a major policy issue in the years ahead. Just last week, the U.S. Supreme Court, boasting a virtually bulletproof conservative majority, heard a new challenge to the Affordable Care Act (ACA, also known as “Obamacare”). President-elect Biden has proposed a Medicare-for-all (public) option for those under age 65, which could become more or less likely depending on the Supreme Court’s Obamacare ruling and Georgia’s two Senate run-off elections in January. This is not to mention the coronavirus pandemic, where U.S. hospitalizations are now hitting new records.
None of us knows the future, so we have no good choice but to plan based on current law. Given all the conjecture about healthcare, it is a good time for a refresher on where we stand under the current rules.
A major subset of our spending, particularly in retirement, is indeed healthcare. Healthcare costs do tend to increase when you retire and can spiral out of control at the end of the life. Let us start with what happens when you retire.
If you are on a good employer-sponsored healthcare plan and you retire and start paying for Medicare, then healthcare costs may spike for you as Medicare is often more expensive than a large employer plan. This could cause an immediate increase in healthcare spending at retirement.
Fidelity Investments estimates that a couple will spend about $280,000 on healthcare throughout their retirement. This does not include long-term care costs. This also assumes the couple will wait until 65 to retire, when they are eligible for Medicare. Obviously, this is a daunting sum, and might be a best-case scenario, especially if you live a long life when long-term care expenses have the potential to skyrocket.
The math behind this $280,000 is relatively straightforward. In today’s dollars, Medicare costs for an individual break down as follows: $1,735 in annual premiums for Part B, $476 in annual premiums for Part D, $1,791 in premiums for a Medigap policy and co-pays / deductibles amounting to $1,125 per year. This totals $10,254 for a couple in annual costs. If the couple retires at age 65 and lives until age 92, the $280,000 is equivalent to about 27 years of Medicare costs.
Remember this amount is in today’s dollars. Healthcare inflation has run substantially ahead of base inflation, the Consumer Price Index, over recent decades. MoneyGuidePro, our retirement planning software provider, expresses healthcare spending as a percentage in addition to the base inflation rate, i.e. excess cost increase (ECI). For example, historical base inflation since 1970 has been 3.57%, and ECI was 2.80%, leaving overall medical inflation at 6.37%.
MoneyGuidePro notes that U.S. healthcare costs were 17.9% of GDP in 2016 and are projected to increase as a percentage of GDP. However, the Society of Actuaries and Milliman research projects this percentage to stabilize during the next 60 years at roughly 31.4% of GDP. Therefore, the excess cost increase should be higher for short-term projections and lower for long-term projections. In other words, believe it or not, it appears that healthcare inflation may ultimately decelerate, albeit very slowly.
Simply said, waiting until 65 (Medicare) to retire is a necessity for many. Private insurance ahead of Medicare can be cost-prohibitive. For example, MoneyGuidePro estimates that private insurance for a 60-year-old woman living in Pennsylvania will cost about $9,900 per year in premiums and another $3,943 in co-pays and deductibles for an annual total of $13,843. That is a princely sum for those retiring before age 65.
This quote is for a “Bronze level” policy under the Affordable Care Act and is the full price without subsidies. Subsidies, which can substantially reduce the costs of an ACA policy, are not available for individuals with income above $51,040 or for a family of four with income above $104,800 in 2021.
Obviously, for certain married couples, one spouse can retire and the other can continue to work and add the non-working spouse to the working spouse’s employer-provided plan. This, however, is not a guarantee of a less expensive premium than we illustrate above. You must do your due diligence around employer-based plans before one spouse decides to retire and piggyback on the coverage of the other spouse.
We have worked with a few high net worth clients who have properly structured income to qualify for meaningful Obamacare subsidies before they qualify for Medicare. Subsidies completely phase out for couples whose income exceeds $68,960 in 2021 and Obamacare subsidies are based on income, not assets. If you do not have other income beyond interest and dividends, you could have a sizeable taxable investment portfolio (not counting IRAs) and still qualify for subsidies.
The calculation of income under Obamacare is highly complex and we must rely on tax professionals to verify them. However, for clients with investable assets; limited other income; where we can manage realized capital gains and losses; and make IRA contributions, being high net worth and getting subsidies is not mutually exclusive. It is hard to rely on this strategy though as Congress has been pushing to end Obamacare almost since it started. Additionally, the U.S. Supreme Court heard arguments again last week on the constitutionality of the ACA.
The one area we have not addressed thus far is long-term care insurance. Planning for healthcare costs in retirement explodes for those few who require long-term skilled care, which can cost at least $100,000 annually (far more in many cases). For those who end up in long-term skilled care for the duration, the average stay is 835 days, or 2.3 years, according to the National Care Planning Council. This in and of itself would be financially devastating for many.
Another reason to consider long-term care is for the benefit of your children and other family members. Fidelity research has found that 25% of baby boomers care for an aging parent. Having long-term care insurance that covers in-home services can help ease the burden on loved ones.
The problem with long-term care insurance is that it is prohibitively expensive. Many people cannot afford the premiums while also properly saving for retirement, paying for children’s education and maintaining their accustomed lifestyle. If you are over 55, can afford the premiums, are healthy and long-term care is a concern of yours, it’s certainly advisable to evaluate a policy, especially if you have a family history of long-term skilled care stays (Alzheimer’s Disease, for example).
For clients with enough savings to cover the cost of extended skilled care, and for whom it is important to leave an inheritance to heirs, then a life insurance policy can sometimes be used to simply replace the funds you spent on long-term care. In many cases, this can be a more cost-effective solution than purchasing a long-term care policy.