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Ways to counterbalance the burden of health-care expenses

Mark Miller McClatchy-Tribune

The cost of health care is one of the biggest out-of-pocket costs facing retirees – and for some, the challenge is getting tougher.

Fifteen million retirees on Medicare get supplemental health insurance coverage from their former employers – and another 2 million retirees not yet eligible for Medicare receive primary coverage from their former workplaces, according to research by the Kaiser Family Foundation.

For retirees age 65 and older, employer coverage typically supplements gaps in Medicare’s coverage – paying for vision or dental care, capping out-of-pocket costs, or covering prescription drugs. For retirees younger than 65, some employers provide primary health insurance.

But the number of employers covering retirees has declined sharply over the years, to just 28 percent in 2013, compared with 66 percent in 1988, according to KFF.

The declining coverage levels reflect changes in the economy, notes Tricia Neuman, senior vice president at Kaiser and director of the foundation’s Medicare policy program. “Retiree health has typically been offered by large corporations in older industries,” she said. “As new companies come on the scene, they’re less likely to offer retiree health care from the start.”

But many employers that provide health benefits are restructuring their programs for current and future retirees. The big trend is the shift to a defined-contribution model, where retirees receive a specific amount toward buying a plan, often in a private insurance exchange offering a range of policies. That approach shifts cost risk from the employer to retirees.

Health care cost inflation has been quiet lately. Fidelity Investments, which publishes an annual report on retiree health care costs, reported last month that a 65-year-old couple retiring this year will need to have saved $220,000 to meet health care expenses during their retirement – the same estimate the company made last year.

Those figures reflect a slowdown in Medicare’s own cost growth. Medicare’s trustees reported recently that the monthly premium for Part B (outpatient services) will stay at $104.90 in 2015 for the third consecutive year.

Still, it’s a fair bet that many retirees with benefits from former employers can expect to bear a bigger share of costs in the years ahead. Here are some strategies that can help.

1. Save with tax efficiency. One savings vehicle shaping up to be especially well-suited for building a health care nest egg is the health savings account. Access to these accounts usually comes alongside high-deductible insurance plans, which are rapidly gaining popularity among employers. Employers and employees make tax-free contributions to the accounts, and balances can be used to meet deductibles. But HSA balances also can be rolled over from year to year, and the accounts are portable. Accumulations and withdrawals also are tax-free.

Roth IRAs are another reasonable option for tax-advantaged savings to meet anticipated health costs in retirement. The big advantage here: Roths are not subject to required minimum distributions in most cases, and most withdrawals also are not subject to taxes.

2. Work longer. It’s not an option for everyone, but a few additional years of work means fewer net years paying Medicare premiums and more years on your employer’s health insurance plan. If you work past age 65, your employer’s coverage remains primary if you work for a company with 20 or more employees; at smaller firms, Medicare’s coverage is primary.

3. Delay filing for Social Security. You are eligible to file for benefits as early as age 62, but your benefit amount will be increased roughly 8 percent for every 12 months that you wait, up until age 70. Filing later means higher annual income for life, which can be a great hedge against high health-care expenses – not to mention the risk of running out of money in old age.

4. Choose Medicare plans carefully. Medicare offers two basic coverage options: traditional fee-for-service or Medicare Advantage, which is a managed-care alternative that offers all-in-one coverage for hospitalization, outpatient services, and (often) prescription drugs.

5. Watch out for premium “brackets.” High-income households pay more for Medicare – and for policies bought through the ACA exchanges. In both cases, careful income planning can save you money on insurance premiums.

In the Medicare program, premium surcharges are applied to Part B and Part D. The surcharges affect individuals with more than $85,000 in annual income and joint filers with total annual income of more than $170,000. The surcharges start at $42 per month and run up to $231 monthly for the highest-income seniors.

For retirees younger than 65, the ACA exchanges offer tax credits to offset the cost of insurance. This year, they’re available for individuals with annual income between $11,490 and $45,960, and from $23,550 to $94,320 for a family of four.

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