Dan McGrath, the co-founder of Jester Financial Technologies, a small health care data company in Beverly, Massachusetts, remembers being in the dentist office with his retired mother and realizing he’d made a grave mistake.
He’d let his mother navigate her own Medicare coverage and that resulted in a $12,000 bill for getting a few teeth pulled because of the plans she’d chosen.
“Health insurance is a big problem,” McGrath says. “It can mean living a wonderful life in retirement or living one in horror.”
Mitigating potential health care expenses can make all the difference. The choices that one makes prior to turning 65 can have a huge impact on an investor’s financial success or downfall during their later years in life.
“Individuals who are reaching 65 need to spend a lot of time understanding their options, because once you make that first election it can be hard or costly to make changes to it in the future,” says Jason Lina, lead advisor at Resource Planning Group in Atlanta. “The ramification can mean tens and thousands of dollars.”
Here are six steps investors can take to protect their retirement nest eggs from sky-high medical bills.
Start by understanding the system. At some point everyone must enroll into Medicare, it’s just a question of when. In order to collect Social Security benefits, retirees must opt into Medicare Part A or forfeit all current, future and past Social Security benefits because it’s a packaged deal. “What most people don’t realize is Medicare is mandatory,” McGrath says. “You don’t have a choice.”
Medicare Part A helps pay for inpatient care in a hospital or skilled nursing facility. Typically this is premium-free coverage, but it still has a deductible of $1,288 per incident or benefit period plus additional charges if someone’s stay is too long, McGrath says.
Medicare Part B covers “everything your doctor does to you,” McGrath says, meaning all medical insurance costs associated with health care providers during an inpatient hospital stay. This coverage also has a premium, an annual deductible, a co-pay of 20 percent, as well as a potential 15 percent excess charge if applied by the physician.
Medicare Part D covers prescription medications once a patient is discharged from a hospital but also has a deductible and a co-pay determined by the insurer of the plan. Many retirees won’t initially sign up for a prescription drug plan without realizing they will later pay a huge penalty to get into the program, Lina says.
His advice: opt-in early to avoid paying more later on.
Ten supplemental Medigap policies fill in the co-pays and coinsurance gaps on hospital, hospice and skilled nursing facility costs. Or individuals can opt into Medicare Advantage, also known as Medicare Part C, which allows companies regulated by Medicare to cover dental care, eye exams and other medical services. Both extend an individual’s medical coverage, but only one program can be chosen.
“If you think you are going to have a lingering problem over the course of a year, you’re better off with Medigap,” McGrath says.
It’s also important to understand that Medicare Part B and D are predicated on how much income you earn. “If you have too much income in retirement, you are paying a lot more – 40 to 200 percent more – than average Medicare premiums,” McGrath says.
Create a health savings account. With no income phase out, this tax-advantage savings plan lets your money sit and grow tax-free. “It’s one of the single biggest things that people can do to save money on both monthly premiums and on future health care costs,” says Joel Ohman, a certified finanical planner and president of Real Time Health Quotes, an independent insurance agency in Tampa, Florida.
There’s no requirement on which financial institution you must use for a HSA, but it’s important to do some research.
“You would probably never think of opening a random savings account at a bank that you’ve never heard of, but that’s what often happens when people sign up for a HSA,” Ohman says. “They will often check the box [on the Medicare paperwork] without knowing about the interest rates.”
Before age 65 the account can only be used on qualified medical expenses, but after retirement it can be used for anything. In 2016, individuals can save up to $3,350, families $6,750 or an additional $1,000 for anyone 55 and older.
Utilize a Roth 401(k) and IRA. For older retirees, a Roth can be converted to an annuity to help provide tax-free income because Medicare doesn’t recognize withdrawals as income. While you can enroll into a Roth until age 65, it’s best to do this before your 64th birthday since when you enroll into Medicare, the last year’s income is considered.
Consider a 401(h) plan. This medical expense account allows a pension or annuity plan to provide benefits for sickness, accidents, hospitalization and medical expenses for retired employees, their spouses and dependents. It’s 100 percent tax deductible and tax deferred. “No one has ever heard of them,” McGrath says. “But they’ve been around since 1984 and are like a health savings account that piggybacks onto a retirement plan.”
Minimize investment income. The IRS only charges capital gains tax on income that’s realized, which allows taxpayers to recognize losses. “There’s a big difference between what you are taxed on versus what you actually made,” Lina says.
To avoid being subject to a higher premiums if you’re above $85,000 for individual 2016 filings or $170,000 if filing jointly, manage your income from a tax efficiency standpoint.
Build a portfolio of diversified assets in taxable brokerage accounts which creates more opportunities to harvest losses, Lina suggests. Instead of having two investments, have five, he says, so if one of the investments goes down you can reduce your taxable income.
“This doesn’t mean buying eight large-cap value funds,” Lina says. “It means buying investments that behave dissimilarly from one another like a U.S. stock fund, an emerging markets stock fund and a European stock fund.”
Then look to harvest net capital losses by replacing the losses with similar investments to reduce adjusted gross income, he says, which is extremely valuable when trying to qualify for insurance subsidies.
Cautiously consider annuities. “An annuity with a chronic care or a long-term care rider is worth its weight in gold,” McGrath says.
Not all annuities are created equally. Check the fee schedule, the guaranteed income amount and how much it is going to cost to access.
“Be very careful,” Ohman says. “There are a lot of fee structures that are difficult to understand.”
(view full article http://money.usnews.com/investing/articles/2016-07-20/6-ways-to-protect-your-pocketbook-from-sky-high-medical-bills)
