The Retiree's Guide to Managing Health Insurance Costs: Strategies for a Healthier, Wealthier Future

Author: Willem Bloemsma, Senior Vice President & Senior Wealth Advisor

Retirement is a time to enjoy the fruits of your labor, pursue your passions, and spend quality time with loved ones. But for some, the joy of retirement can be overshadowed by a looming concern: healthcare costs. However, with proper planning and a solid understanding of your options, you can take control of your healthcare costs and secure a healthier, wealthier retirement.

In this guide, we'll explore some key strategies for managing health insurance in retirement: navigating hidden Medicare costs, bridging the health insurance gap in early retirement, and deciding whether to self-insure for long-term care.

The Hidden Medicare Tax: What High-Income Retirees Need to Know

Medicare can be a welcome relief from the high private health insurance costs. However, you may not realize that your retirement income can significantly impact your Medicare premiums, thanks to a little-known provision called IRMAA.

What is IRMAA?

IRMAA, or the Income-Related Monthly Adjustment Amount, is a surcharge that high-income retirees pay on top of their regular Medicare Part B and Part D premiums. The surcharge is based on your modified adjusted gross income (MAGI) from two years prior, and it can add hundreds or even thousands of dollars to your annual Medicare costs.

For example, in 2024, if your MAGI exceeds $103,000 (for singles) or $206,000 (for married couples filing jointly), you'll pay up to $419.30 more per month for Part B  on top of your standard premium. The IRMAA increases start at $12.90 monthly and increases with your income level. 

Strategies for Minimizing IRMAA 

There are several strategies you can use to minimize your exposure to IRMAA and keep your Medicare costs in check. 

Roth conversations 

One option is to do Roth conversions in the years leading up to Medicare enrollment. Moving money from tax-deferred accounts (like traditional IRAs or 401(k)s) to Roth accounts can reduce your MAGI in future years and potentially avoid the IRMAA surcharges.

Qualified charitable distributions

Another strategy is to maximize your charitable giving through qualified charitable distributions (QCDs) from your IRA. If you're over 70½, you can donate up to $105,000 per year directly from your IRA to a qualified charity, which counts towards your required minimum distribution (RMD) but doesn't increase your MAGI.

Form SSA-44

Another important strategy to potentially reduce your IRMAA is to report significant life changes to the Social Security Administration using Form SSA-44. This form allows you to request a reduction in your IRMAA if you've experienced a major life event that has lowered your income.

If approved, the SSA will then recalculate your IRMAA based on your new, lower income rather than using the income from two years prior. This can potentially lead to significant savings on your Medicare premiums.

Common life-changing events that may qualify for an IRMAA reduction include:

• Marriage
• Divorce
• Death of a spouse
• Work stoppage (such as retirement)
• Work reduction (partial retirement)
• Loss of income-producing property

It's also important to consider other income sources impacting your MAGI, such as capital gains, dividends, and rental income. By working with a financial advisor to develop a holistic tax strategy, you can minimize your exposure to IRMAA and keep more of your hard-earned money in retirement.

Bridging the Health Insurance Gap in Early Retirement

Early retirement is a dream come true for many high net worth individuals. But if you retire before age 65, you'll need to find alternative health insurance coverage to bridge the gap until you're eligible for Medicare. 

This can be a tricky period to navigate, as private health insurance can be expensive, and options may be limited. 

COBRA: A Short-Term Solution

One option for bridging the health insurance gap is COBRA, which allows you to continue your employer-sponsored health insurance for up to 18 months after leaving your job. While COBRA can provide seamless coverage during the transition to retirement, it's important to understand the costs.

Under COBRA, you'll typically pay the full premium for your health insurance plus a 2% administrative fee. This can be a significant expense, especially if you're used to your employer paying for a portion of your premiums. Additionally, COBRA is only a short-term solution, so you'll need a plan for when your coverage ends.

The Affordable Care Act: A Longer-Term Option 

Another option for early retirees is to purchase a health insurance plan through the Affordable Care Act (ACA) marketplace. Depending on your income, you may qualify for premium tax credits that can significantly reduce your monthly costs.

However, it's important to carefully manage your income in early retirement to maximize your ACA subsidies. If your MAGI exceeds 400% of the federal poverty level (which equates to about $64,000 for a single person and $81,000 for those married filing jointly in 2024), you'll lose the subsidy entirely, resulting in a significant increase in your premiums.

To avoid this "subsidy cliff," you may need to get creative with your income sources in early retirement. This could involve drawing from Roth accounts (which don't count towards your MAGI), doing Roth conversions in low-income years, or working part-time to keep your income within the subsidy range.

Private Health Insurance: A Last Resort 

If COBRA and the ACA aren't viable options for your situation, you may need to consider purchasing a private health insurance plan. While private plans can be expensive, they may be the only option for some early retirees, particularly those with pre-existing conditions.

When shopping for a private health insurance plan, it is important to review the coverage options and out-of-pocket costs. Look for plans with low deductibles and copays, and make sure your preferred doctors and hospitals are in-network. 

You may also want to consider a high-deductible health plan (HDHP) paired with a health savings account (HSA), which can provide tax benefits and help you save for future healthcare expenses.

Long-Term Care Insurance: Is Self-Insuring Better?

As we age, the likelihood of needing long-term care increases. Whether it's assistance with daily activities like bathing and dressing or more comprehensive care in a nursing home or assisted living facility, long-term care costs can quickly deplete even a sizable retirement nest egg.

The Pros and Cons of Long-Term Care Insurance

 One option for managing the risk of long-term care expenses is to purchase a long-term care insurance policy. These policies can help cover the costs of in-home care, assisted living, or nursing home care up to a certain daily or lifetime maximum.

However, long-term care insurance can be expensive, and premiums have risen recently. In 2024 the price for a $165,000 policy is about $1,175 per year, or about $98 per month, for a 60-year-old single man, and $1,900 per year, or about $158 per month, for a 60-year-old single woman.

Additionally, there's no guarantee that you'll need long-term care, which means you could end up paying for coverage you never use. And even if you do need care, your policy may not cover the full cost, leaving you with out-of-pocket expenses.

The Case for Self-Insuring 

For high-net-worth individuals, self-insuring for long-term care may be a better option. This involves setting aside a portion of your retirement savings specifically for long-term care expenses and investing those funds in a diversified portfolio.

The key advantage of self-insuring is that you retain control over your money. If you don't need long-term care, leave those funds to your heirs or use them for other purposes. Additionally, by investing your long-term care funds, you have the potential to grow your nest egg over time, which can help offset the rising costs of care.

Of course, self-insuring does come with some risks. If you need care for an extended period, you could deplete your long-term care savings and need to tap into other retirement assets. Additionally, if your investments don't perform as well as expected, you may not have enough money to cover your care needs.

Factors to Consider 

Ultimately, the decision to self-insure or purchase long-term care insurance depends on various factors, including your health status, family history, and overall financial situation. Here are some key considerations to keep in mind:

• Your current health and family history of long-term care needs
• Your retirement income and assets, and whether you can afford to self-insure
• Your personal preferences for care (e.g., in-home care vs. nursing home)
• Your risk tolerance and investment strategy
• The potential impact on your estate and legacy planning

It's important to work with a financial advisor who can help you develop a long-term care plan that aligns with your goals and values. 

Conclusion

Managing healthcare costs in retirement is a critical aspect of financial planning that often gets overlooked.  At Compound Planning, we specialize in helping high-net-worth individuals navigate the unique challenges of retirement planning. Our team of experienced financial advisors can help you develop a comprehensive healthcare plan that considers your specific needs and goals.

Whether you want to minimize your Medicare costs, bridge the health insurance gap in early retirement, or develop a self-insured long-term care plan, we're here to help. With our data-driven approach and personalized advice, we can help you make smarter decisions and achieve your retirement dreams.

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