Early retirees must budget for health costs
Contemplating early retirement? Make sure that health insurance figures prominently into your calculations, especially if you plan to retire before Medicare coverage kicks in at age 65.
Health insurance premiums are increasing faster than wages and the growth of the overall economy. Some companies offer subsidized health benefits to employees who retire before age 65, but a substantial perk like this is becoming less and less common. If your employer doesn't subsidize health benefits, your first option is to remain on the health plan you had while working. Federal law requires that you be offered continuation coverage, known as COBRA, for up to 18 months when you leave your job, but you have to pay the entire cost of the insurance yourself plus a 2 percent administrative fee. "Although the benefits are not subsidized, this is an important advantage to retirees, because they are only paying the average cost incurred by plan participants, most of whom are younger and cheaper to insure than the retirees," says Richard Johnson, a principal research associate at the Urban Institute. You can find out about COBRA coverage at www.dol.gov, under health plans and benefits.
After 18 months, you must turn to the expensive private nongroup insurance market. Purchasing a high-deductible plan might save you money on premiums, but if you get sick, your out-of-pocket expenses could be hefty. "Health insurance options tend to be expensive, very limited, or both. But going without health insurance when you are in your 60s is much riskier than when you are in your 20s," says Alan Garber, director of the Center for Health Policy at Stanford University. "Be a smart consumer of healthcare. Look for information about which treatments work and provide a good value." You might also put some money into a medical savings account before you retire. It is a tax-deferred savings vehicle similar to an IRA that allows you to save money for future medical expenses. If you're shopping for private health insurance, AARP has a buyer's guide at www.aarphealthcare.com. AARP also allows its members in several states to buy into the AARP personal health insurance plan.
One quick solution to a lack of health insurance is getting a part-time job that offers health benefits until you turn 65. "The lack of health insurance coverage will keep many people from retiring before they reach age 65," says Garber. Many part-time jobs give you the freedom to choose your own hours in addition to providing subsidized health insurance coverage, employee discounts, and, oh yes, a paycheck.
As new technologies continue to be developed, the cost of healthcare apparently has nowhere to go but up. "The most important reason for rising costs is that we are so good at developing new ways to diagnose and treat disease. The typical new drug, imaging test, or procedure increases health expenditures rather than decreasing them," Garber says. The high administrative cost of seeing multiple doctors and specialists, along with the flow of insurance paperwork, also pushes costs skyward. And the cost of health insurance is not likely to ease. A typical married couple ages 65 and older will spend about $13,000 per year on out-of-pocket healthcare costs in 2020, predict Johnson and Rudy Penner of the Urban Institute. Health costs like this will consume 29 percent of after-tax income, the researchers say, which Johnson calls a conservative estimate.
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