What Are the Best Tools to Prepare for Healthcare Costs in Retirement?

This podcast was recorded on Sept. 6, 2016.

Alison Southwick: John writes: "As I type this, I am listening to how people screw up their retirement. My biggest concern is healthcare. Are there any good tools for preparing for this eventuality? We currently put a good percentage into our 401(k)s and we max out our HSA. Should one count on Medicare to offset the majority of their healthcare costs late in life? Is there a good health insurance product out there for the retired elderly?"

Let's keep talking about insurance premiums. Let's go. Let's do it.

Sean Gates: You have to be careful about inflation on Medicare. No, that's not right at all. This is actually a fantastic question, and I think a lot of financial bigwigs and planners out there don't know that much about the Medicare space and health insurance for retirees, or know very little. That includes me, so I'm going to stop talking now. Just kidding.

So the key thing is that you have an HSA. That is the best account that exists.

Robert Brokamp: It stands for health savings account, by the way.

Gates: Health savings account. And the reason that it's the best account that exists is because it's tax-free on both ends. You get a tax deduction as you contribute to the HSA, and then when you go to withdraw from the HSA, it's tax-free if you use it for medical expenses. And medical expenses can include your Medicare premiums.

However, once you reach Medicare age, you can no longer contribute to an HSA, and so there's sort of a finality to that account, different than some other accounts, and that is your best resource. Otherwise, you would want to look to Medigap policies.

We won't go into the enormous amount of detail that exists on Medigap. I will just say the hilarity of it is that there are Medigap policies that include the letters A through G, I think, and they each list out various, different benefits, so it's a huge ball of wax in terms of the detail that gets in there.

Brokamp: And it depends on where you live, and not all policies are available in your area, so it definitely makes sense to go to sites like Medicare.gov to see what's actually available to you. But it is important because when you work, if you have a good job, you're used to your employer paying for the premiums for your insurance.

And then when you retire, you're on your own, and you have to do it yourself. You have to look at policies and choose them, and see what fits your budget, and you have to match them up with your particular ailments. It's actually quite complicated, and it's something to be thinking about many years before you retire.

Gates: And to answer your question more poignantly about whether Medicare is enough, it's not. We often model about $4,000, roughly, per year for everybody of additional expenses, even assuming that you have Medicare, and part of the reason for that is Medicare doesn't cover dental at all, and dental for older folks can get quite expensive, because your teeth start falling out, because you're old.

Southwick: Sorry. Spoiler, John.

Gates: One final thing I would mention is that the HSA account, combined with Obamacare, is a super-powerful combo, because HSAs are only allowed on high-deductible plans, typically. There are a lot of high-deductible plans available through Obamacare, so if you are an early retiree, there's a massive opportunity to combine those two things and really have a nice healthcare plan in place.

Southwick: Awesome. I think that nailed it.

Brokamp: That was good.