Do you think that your health insurance premiums are outrageous right now? (You’re probably right, by the way) It may actually get worse! A lot of people (mistakenly) believe that health insurance will be reduced to a non-problem in retirement. In fact, health insurance costs are commonly ignored when people plan for retirement. But there are at least five reasons why health insurance may be higher in retirement than it is right now.
1. No More Employer Health Insurance Contribution
Despite the existence of Obamacare, tens of millions of people continue to go without health insurance.
How can it be? Didn’t Obamacare fix that problem? The answer is sort of.
Most of what Obamacare did was either a) enable people between the ages of 19 and 26 to remain (or be reinstated) on their parents health insurance plans, or b) expand Medicaid for low income people and households. But if you aren’t a young person between the ages of 19 and 26, or if you’re not considered to be low income, the health insurance situation is worse than it’s ever been.
Just as was the case before Obamacare, people who didn’t have health insurance through their employers didn’t have health insurance at all. It’s not so much that employer-sponsored health insurance is cheaper, but rather that the monthly premium is payroll deducted, and heavily subsidized by the employer.
That last point is critical when it comes to retirement. Employers typically pay anywhere from 40% to 80% of the cost of health insurance premiums. That can reduce an otherwise unaffordable $1,000 per month premium to a very comfortable $400 – or roughly the amount of the average car payment.
When you retire, you’ll no longer be covered under your employer’s plan. That means no more employer paid health insurance subsidy – you’ll have to bear the cost of your health insurance entirely from your own resources.
But that doesn’t matter because you’ll have Medicare, right?
2. Medicare + Medicare Supplement
Medicare is largely seen by people approaching retirement as the golden ticket out of the healthcare malaise that we have here in the US. There was a time when that may have been true, but the dynamic is shifting rapidly.
First of all, you have to pay monthly premiums in order to get Medicare. These are fairly low, and deducted from your Social Security, making them seem more tolerable. For 2016 the Medicare monthly premium is $121.80, or about $244 per month for for a married couple.
That may seem reasonable on the surface, but Medicare has been scaling back benefits for years in an attempt to control the runaway costs of the program. We should expect that situation to get worse, since there’s no political will in Washington to make any kind of serious changes.
According to the Social Security Administration’s A Summary of the 2015 Annual Reports, by the Social Security and Medicare Boards of Trustees, the Medicare program is already operating in deficit, and will exhaust its trust fund reserves by 2030.
For this reason, we should fully expect to be squeezed on both sides, by a combination of increasing Medicare premiums, and decreasing Medicare benefits payments.
This is why many millions of retirees now carry Medicare supplemental policies, sometimes known as Medigap policies. These policies can cost several hundred dollars per month in premiums. If you are an individual paying $122 per month for Medicare, plus another $250 for a relatively inexpensive Medicare supplemental policy, you’re up to $372 per month. If you are a married couple, that doubles to nearly $750 per month.
If you’re currently on your employer’s health insurance plan, $750 per month is probably more than you’re paying as your part of the premium. And again, that’s with a cheap supplemental policy, which means your co-payments and out of pocket costs will be higher.
From where we stand right now, it’s probably reasonable to assume that a single person will be paying somewhere between $350 to $500 per month for health insurance, while a couple should expect to pay somewhere between $700 and $1,000 per month. That’s not a whole lot less than the cost of unsubsidized private coverage during your working years.
3. Healthcare Inflation
If you spend much time reading the financial press, you may be slightly convinced that the rate of inflation is around a very tame 1.something per cent. I have serious doubts about that, but one thing is certain: health care inflation is much higher. In fact, it’s expected to run at 5.8% for the foreseeable future. Using the accountants “rule of 72”, that means that we can expect the cost of healthcare to roughly double in the next 12 years. If you are 20 or 30 or 40 years away from retirement, the outcome will be significantly greater.
Given the amount of money that is being poured into healthcare, we should fully expect healthcare inflation to continue unabated. Exactly how this can be accurately forecast for retirement planning is entirely an open question.
4. The US Healthcare Situation is a Complete Wreck
Optimists want to believe that there’s a political solution to the US healthcare crisis somewhere in the future. We’ve been hearing about this for decades, and nothing seems to happen. Obamacare was touted as a complete overhaul of the system, but it has done nothing to stop the relentless rise in the cost of healthcare.
The reasons for this are more than a little political. This is just my opinion, but with healthcare costs representing 18% of America’s gross domestic product, healthcare – like the big banks and select big corporations – has been deemed too big to fail. That means that the political system in the US has little interest in containing costs, but great interest in keeping this rapidly growing, major component of the US economy moving forward.
A growing healthcare sector is seen as necessary to grow the US economy, much as real estate is. Have you noticed that in the face of declining employment in other sectors of the economy, the solution for the American worker is increasingly to get training, certification, or a degree in some area of healthcare?
And at some deep psychological level, it’s likely that there is generally widespread public support for more spending on healthcare, in the mythical hope that we can live forever (as a Bible-believing Christian, I do not participate in that fantasy – Hebrews 9:27).
It’s likely that the dysfunction in the industry will become even more dysfunctional going forward.
5. The Early Retirement Dilemma
Early retirement is become something of a closet industry in the blogging universe. Everyone’s going to save and invest their money – at perpetual double-digit rates of return – and retire at age 55, 50, 40, or even 35. As a blogger, I actually read a lot of these articles. One discussion that is highly conspicuous by its absence is how the would-be early retiree will deal with outrageous health insurance premiums. Since early retirement will occur under most projections in middle age, that will translate into health insurance premiums that will be as big as a house payment.
If you are serious about planning for early retirement, you are going to have to address this issue. It is likely that health insurance will be at least the second largest line item in your early retirement budget, and maybe even THE biggest. If you’re not prepared to deal with this, then early retirement will be more of a wish than an attainable goal.
All of the problems associated with health insurance will be magnified with early retirement. You’ll be too young to get Medicare, too old to get cheap coverage on the health insurance exchanges, and probably too prosperous to qualify for Medicaid.
What’s the Solution?
The pessimist will say that all of this right on the money. But the optimist will say that it’s nothing but doom-and-gloom nonsense – there’s a solution out there somewhere, there has to be. But the only logical position to take is that of a realist, and that means recognizing the situation as it really is. And it isn’t a happy one.
You can be as optimistic as you want in your assumptions, but the more responsible position is to be pessimistic in your planning. The reality is that the healthcare situation has gotten progressively worse in the past decade, the past two decades, and in the past three decades. If you think that it will fix itself then you’re betting against the historical trend.
Given that the crisis state of healthcare and health insurance is apparently intractable at the national level, what can you do on an individual basis to deal with it in retirement, a time when you will likely be physically more dependent on the system, and financially less able to cope?
Here are 7 strategies to deal with high retirement health insurance premiums:
- Optimize the state of your health. Many of conditions experienced in old age are the result of bad habits early in life. While you are preparing your finances for retirement, make sure that your body is equally prepared. The less dependent you are on the healthcare system, the more options you will have.
- Stay on top of health insurance developments. The usual strategy is to ignore it under the assumption that somehow it will work itself out in time for your retirement. That’s a bad assumption. Knowledge is power, and you’ll need plenty of it here. Pay particular attention to new and unconventional developments – they could be the wave of the future.
- Build a high health insurance premium into your retirement planning. At current cost levels, assume $500 per month if you’re single, and $1,000 per month if you’re married. If it’s too high you’ll have extra income for other purposes. But chances are, it’ll be higher than you think it will be.
- Semi-retirement may be preferred to complete retirement, since it may provide access to an employer-sponsored health insurance plan. If you haven’t adequately calculated health insurance into your retirement budget mix, this may be the preferred solution, especially if you are planning on early retirement.
- Prepare to create an income stream that will be dedicated specifically to paying your monthly health insurance premiums, including Medicare and a Medicare supplement.
- Have a healthy post retirement emergency fund that will not only provide you with cash to pay for uncovered medical expenses (particularly from a cheap Medicare supplemental policy) or to deal with sudden premium shocks. It may not be a permanent solution to the premium problem, but it will give you some time to maneuver.
- Eliminate or reduce expenses. If it seems likely that you won’t be able to afford high retirement health insurance premiums, develop a plan to seriously reduce or eliminate other expenses to make room for the premiums.
This is a difficult and emotional problem – it’s easy to see why so many people prefer to ignore it. What is your assessment of preparing to deal with health insurance premiums in retirement? And what strategies can you add to the list above?