Planning for higher retirement health costs

Today, health-care costs for retirees average over $9,000 per year. By the time you retire, they are likely to have risen even further. But planning can be tricky, because changes in health and the associated costs are unpredictable.

The financial impact of dealing with a serious illness can be devastating. Even everyday medical expenses, such as prescription drug costs and routine medical services can add up over time. For example, by 2019 a 65-year-old married couple without an employer-based health plan and with median drug expenses could need $464,000 to $567,000 to pay for Medigap, Medicare Part B and Part D premiums and out-of-pocket drug expenses.¹

Your needs may be different depending on your gender. For example, today 75% of nursing home residents are women.² In general women live longer, and are more likely to require a very long period of care.

Introduction to Medicare

Medicare is a federal health insurance program that provides coverage for people age 65 and older, and for some disabled people under age 65. The program consists of four parts, each of which covers different retirement health costs.

Medicare Part A	Medicare Part B	Medicare Part C	Medicare Part D
Hospital Insurance	Medical Insurance	Medicare Advantage	Prescription Drug Plan
Helps pay for in-patient care in a hospital or skilled nursing facility (following a hospital stay), some health care and hospice care	Helps pay for doctors' services and many other medical services and supplies that are not covered by hospital insurance	Allows you to participate in PPO-, PPS-, and HMO-type managed care plans	Helps pay for medications prescribed by doctors
No premium if you and your spouse paid Medicare taxes during 40 or more quarters	Optional coverage Requires a monthly premium payment for all participants3	If you are enrolled in Medicare Part A and Part B, you are eligible to switch to Part C.	Pays outpatient drug care costs Requires a monthly premium payment for all participants4 Deductible and cost-sharing limits may apply.

The plans Medicare Part C allows you to participate in include:

• Preferred Provider Organization (PPO). This plan allows you to see any doctor or specialist; however, visiting doctors outside your PPO network will involve extra costs.
• Health Maintenance Organization (HMO). You have access to doctors in the HMO network only.
• Private Fee-for-Service (PFFS). You can see any doctor who is willing to accept the fees and terms of the PFFS.
• Special Needs. These plans are intended for people with certain chronic diseases or special health-care needs.
• Medical Savings Account (MSA). This plan includes two parts: a high-deductible health insurance plan and a savings account in which Medicare deposits money for you to use for health-care costs.

Enrolling in Medicare

Medicare is only for people 65 and older (unless you are disabled). You will be automatically enrolled at that age 65 if you are eligible for or already receiving Social Security.

If you reach 65 and want to enroll in Medicare, but are not yet taking (or not eligible for) Social Security, you can enroll three months before the month of your 65th birthday and the three months after. For example, if your birthday is March 15, you can apply anytime from December through the end of June.

Medigap and Medicaid

Medicare is only one of the sources of government-based health-care coverage available to retirees. You may also be eligible for Medigap or Medicaid.

Medigap	Medicaid
Individuals enrolled in Medicare Parts A and B are also eligible to purchase Medigap coverage from insurance companies. Coverage and costs vary by state. Generally covers all or part of the costs not covered by Medicare, deductibles, co-payments and co-insurance Enroll through private insurance agencies.	Individuals with limited income who meet certain requirements may also be eligible to receive Medicaid. Medicaid is an insurance program sponsored jointly by states and the federal government. Covers some hospital care, prescriptions and nursing home costs Enroll through your state's Department of Human Services.

Health coverage through COBRA

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) makes health coverage available at group rates for employees and their dependents who would otherwise lose health benefits when they retire, lose their job or have certain other qualifying events.

Qualifying event	Maximum coverage period**
Reduced work hours < 20 week	18 months
Employment termination or retirement	18 months
Employee's death	36 months
Divorce, legal separation or annulment	36 months
Employee's enrollment in Medicare	36 months
Dependent child's eligibility ends (for example, by exceeding plan's age limit, no longer being a full-time employee)	36 months

**If there are multiple events, the coverage period cannot exceed 36 months.

Generally, employers with 20 or more employees are subject to COBRA. Coverage applies to employees, former employees and certain dependents who are or were covered under a group health plan. Benefits include medical, dental, vision, health-care reimbursement and employee assistance programs.

Long-term care

Long-term care (LTC) is medical and personal care for the chronically ill or disabled, and can be provided at home or in a nursing home. For the many retirees who are expected to require long-term care, the average duration is estimated to be about three years. The average cost for a private room in a nursing home in 2007 was about $75,000 per year. That's up to $225,000 for three years of care — a major expense which is expected to rise, and for which Medicare and Medigap policies offer only limited, if any, coverage.

LTC insurance can help. Premiums vary by company, but are generally based on your age, health status and the level of benefit you are purchasing. If you know where you plan to live in retirement, make sure that the benefit on your LTC insurance policy will be enough to cover the average cost of care for that region.

Also, remember that disability income insurance is not the same as LTC insurance. Disability income insurance replaces income from work, whereas LTC provides for medical and personal care.

High-Deductible Health Plans and Health Savings Accounts

If you intend to retire early and no longer have employer-sponsored health insurance, a High-Deductible Health Plan (HDHP) may offer a practical bridge for your medical costs until you're eligible for Medicare at age 65. HDHP differs from other health insurance because its high deductible allows the policy to be offered at a relatively low cost.

If an HDHP meets certain requirements, the policy holder may also open a Health Savings Account (HSA) to pay for HDHP deductibles and other qualified out-of-pocket costs. Money withdrawn from the HSA to pay for qualified expenses is tax-free, as long as the expenses were incurred after the HSA was established and funded.

For 2009, the maximum annual contribution rates to an HSA are $3,000 for an individual and $5,950 for family coverage. Those who have reached age 55, but not yet 65, may contribute an additional $1,000 for 2009.

You can use an HSA account to pay for medical expenses as they occur, or you can accumulate funds in the account to pay for future health-care expenses. Note that any distributions taken prior to age 65 that are not used for eligible medical expenses are subject to income tax and a 10% penalty.

An Ameriprise financial advisor can work with you to create a retirement income plan that includes retirement health costs and other major expenses in retirement.