How to figure out health care expenses in retirement?

[isisdave]

Who is looking back 2 years? Medicare? By the time I can apply for Medicare, I will have been retired for 3 years so my income for the prior 2 years will be social security and whatever I take out of my retirement accounts.

Your FA will clue you in when the time comes. You probably won't be impacted. Most people aren't. But converting traditional IRAs to a Roth is a taxable event, and many people don't think of that. IRMAA is a surcharge for high-income Medicare enrollees, only lasts a year if the income bump isn't continuing, and it's an additional $259 a month (each) for your Part B. Also, it's sometimes possible to get it refunded if you had a one-time income bump. My observation is that people who run into it have way enough money not to have to worry.

When you're retired (meaning little income) and over 59.5, you might want to consider converting some traditional IRA or pre-tax retirement funds to Roth annually. With the current standard deduction now $31.5k for a couple, and more if > 65, and low costs in Alabama, you might be able to convert $10-25k per year with little or no tax liability. We've done this since trading CA real estate for Indiana in 2021. This will lower your RMD burden when they kick in, and Roths are friendlier to your heirs, if that matters.

RMDs (Required Minimum Distributions) from traditional IRAs currently start the year you turn 73. If you were born on or after January 1, 1960, RMDs will start at age 75. They start at about 4% and are less than 5% before age 80. Again, lots of time and FA will advise.

 

[sue1947]

The money in a 401K, 403b, or 457b is not taxed when you roll it over- only when you withdraw it.

There's more nuance here.
If you roll this money over into a regular IRA, it isn't taxed. If you roll it over into a Roth, it is. The idea behind those original IRAs was that you would be in a lower tax bracket at retirement so it made sense to take the tax deduction for the smaller amount and then pay tax on the earnings. Your situation is likely going to be the reverse. You could very likely be in a very high tax bracket once those Req Min Distributions hit. Spending down those regular IRAs (401K,403b etc once you've retired and pulled that money out) now either by using the money instead of taking SS, or rolling it over into a Roth makes a lot of sense.
Roths aren't subject to RMDs. By doing the conversion now, when you can control your income, you can also control the tax rate on the money taken out, and then all the earnings on the Roth are not taxed.
Ex: If you are 62 today and Mr H is 67 today. For every $100,000 of regular IRA you now have, you can expect to pay an additional $7600 in RMDs for the first year increasing up to $15K as time progresses. If you have $500K in those accounts, that's $38,000 in additional income.
At $32K in income (including tax free interest and half of your SS), half of your SS becomes taxable. At $44K, 85% of it becomes taxable.
Between the SS and your RMD, you can easily get bounced from a 24% tax rate up to 32%.
And your Medicare costs more because you have more income.
It might be a lot better to pay the tax on that pre-tax IRA at the 10-20% tax rate, delay SS (which gets you a guaranteed 8% RISK FEE return) and convert as much of your regular IRA to a Roth as you can.
Have your financial advisor run the RMD for your specifics. I've been rolling over to Roths since I could, and it will likely save me a bit on the tax rate. However, the big savings is the taxes I would have paid on the earnings. I really wish I had fully understood this aspect of Roths when they first came out.

And, honestly? I would take SS benefits as soon as you are at all eligible, because I don't think there will be SS anymore in the next 10-15 years, either.

IMO, ending SS would be political suicide. However, given the level of financial (il)literacy in the country and political leaders, hedging your bets is a good idea.

 

[Elan]

Not to hijack the thread, but a related question:

I retired about 27 months ago. I had/have a sizable 401k (rolled to IRA) and close to an equal amount in post tax investments that generate additional income from interest, dividends and taxable capital gains.

I never started a Roth. I have been withdrawing a relatively small amount ($5k pre-tax) from my IRA monthly for expenses (along with SS, which I started at age 62 this January). I have been under the assumption that there's no benefit to converting any funds to Roth from IRA as it's all now coming from the same taxable IRA pot. Is this assumption correct? Am I missing something?

Edited to add: With respect to medical expenses, I've been pretty healthy my entire life. Never spent a night in a hospital and have no prescriptions. Resting heart rate in low 50's. Somewhat ironically, since retirement I've had a couple of pre-cancerous skin surgeries, a hip replacement, and am just now getting to end of recovery from retinal detachment surgery. And I have a second hip replacement scheduled for November. Point being that medical history isn't always a great indicator of what might be right around the corner. I will have hit max OoP of my wife's high deductible insurance policy for the past 2 years.

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[Passepartout]

One nice thing is that darn near no decision we make going into retirement is set in concrete. With little difference overall, you can adjust as your income and situation changes- as it will.

 

[VacationForever]

Not to hijack the thread, but a related question:

I retired about 27 months ago. I had/have a sizable 401k (rolled to IRA) and close to an equal amount in post tax investments that generate additional income from interest, dividends and taxable capital gains.

I never started a Roth. I have been withdrawing a relatively small amount ($5k pre-tax) from my IRA monthly for expenses (along with SS, which I started at age 62 this January). I have been under the assumption that there's no benefit to converting any funds to Roth from IRA as it's all now coming from the same taxable IRA pot. Is this assumption correct? Am I missing something?


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When you reach RMD age, you will be forced to withdraw from your IRA and that will bump you into higher tax bracket. Also, you may end up with paying IRMAA (Medicare Part B and D penalty). If you convert some of the IRA money now, you can even out the tax bracket and avoid the "tax topedo" and not be subject to IRMAA.

 

[Elan]

When you reach RMD age, you will be forced to withdraw from your IRA and that will bump you into higher tax bracket. Also, you may end up with paying IRMAA (Medicare Part B and D penalty). If you convert some of the IRA money now, you can even out the tax bracket and avoid the "tax topedo" and not be subject to IRMAA.

Right. And that's part of why I've been pulling $ out of IRA for last 21 months. But the question is whether there's any advantage to pulling even more out to fund a Roth. My understanding is that it doesn't matter, other than future gains in Roth would be untaxed.

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[VacationForever]

Right. And that's part of why I've been pulling $ out of IRA for last 21 months. But the question is whether there's any advantage to pulling even more out to fund a Roth. My understanding is that it doesn't matter, other than future gains in Roth would be untaxed.

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The idea is to drain the IRA enough to keep future tax bracket down. You can spend the money or convert to Roth. If you convert to Roth, you can use taxable money to pay taxes on the conversion, which can also help reduce dividends of those taxable money, which can positively impact your tax situation.

 

[missyrcrews]

Good Lord. I shall just work until I'm 100....

 

[SmithOp]

Right. And that's part of why I've been pulling $ out of IRA for last 21 months. But the question is whether there's any advantage to pulling even more out to fund a Roth. My understanding is that it doesn't matter, other than future gains in Roth would be untaxed.

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You might want to run some numbers if you are 65 or over,, there is an additional $6k deduction each for the next 4 years from the Big Budget Bill. This is whether you take standard or itemized deductions. Thats $12k for a married couple. We don't need the lowered taxable income right now so I'm considering rolling $12k of 401k into my Roth.

WRT Social Security, it's not in danger of going broke, but it could take a 23% benefit cut for everyone by 2033. No politician has wanted to touch it so it's really too late to do anything about it. I decided to start at FRA instead of waiting until 70 because of this. Dr Ed Weir is an authority on the subject, he was a SS manager for many years.

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[sue1947]

But the question is whether there's any advantage to pulling even more out to fund a Roth. My understanding is that it doesn't matter, other than future gains in Roth would be untaxed.

Since you retired 27 months ago, the S&P500 has gained 30%. That means for a $500K portfolio, you would now have an additional $150K (all taxable). Drop that return to a more conservative 8%/year for the future and that now $650K will double to $1,300,000 in 9 years. At that point, you will have an additional $800,000 in TAXABLE income if you left it in the current account. That extra $800,000 also counts towards determining your RMD which potentially puts you in a higher tax bracket.
On the other hand: if you rolled that $500K into a Roth, you would still have that extra $800K, but not owe taxes on it and it won't count towards your RMD, reducing your future taxes further.
In reality, you wouldn't convert that whole $500K at once, but rather in portions based on your current tax situation. But you get the idea. Over time, you likely will have more in the account from your gains than the original amount. The not taxing future gains is what makes Roth IRA such a great deal.

 

[DrQ]

My policy it will be. I am on a state retirement plan. They moved the retirees to a Medicare advantage plan.

Then yours is NOT a MA plan open to the general public and my Cliff's Notes was not applicable. That's like recommending USAA to someone who is not eligible to join.

Here is the other thing that just happened in our area: A MA group was no longer being accepted by the hospital/medical group I use. So members of this MA were forced to choose between their doctors or find a new MA plan accepted by the group. Medicare parts A & B are the lowest common denominator in healthcare insurance currency other than straight up cash. You have already experienced this:

The problem has been that when my husband needed a rehab facility, they balked at our insurance

If a facility takes payment from one patient (Medicare A or B), they have to accept all. That is not the case with MA plans. They can accept MA (company A) and reject MA (company B) and the situation could reverse the following year.

 

[FunnyFarm]

Is there some rule of thumb to figure out health care expenses in retirement? I asked my excellent financial planner and his answer was kind of vague. Long term care insurance like my Mom has (he is also my Mom's FP) is no longer a viable option and he's not discussing annuities with me. He kind of said its a wild card and the best thing you can do is have as much money as possible and hope for the best.

I am 59 and since moving to Alabama realize it may now be possible for me to retire at 62. Mr H will be 67 then.

I am clueless about medicare but just tried to look it up today and it seems like 2 people might be $600/month. I know from age 62 to 65, I would need to pay for private insurance which I figure would cost me around $15,000/year. I have way more than that in an HSA so I should be ok.

When I run retirement numbers, I am figuring we'd spend 50% more per month in retirement than we do now just to be safe and I figure 4% annual increase in our expenses. Paying Medicare at $600/mo would be around 15% of our current monthly expenses so my 50% increase should cover fixed medical expenses.

What about the worst case scenarios- like one or both of us need long term care of some kind? Do you just figure some random amount like $500,000 each just to be safe? I will inherit at least that dollar amount as the "deposit" from my Mom's assisted living (its not really mathematically possible for her to burn through her remaining cash, so I should get that lump sum one day at a minimum) and our house is paid for- so these two things seem to me to cover two long term care "disaster" scenarios, one for each of us.

Is that it- have an idea of your fixed medical expenses through Medicare, then some resources to throw at long term care expenses if you need them? Is $500,000 a reasonable dollar amount for these types of expenses. Obviously I know that true expenses are unknown but I am just trying to assume something semi-reasonable so that I don't work an extra 10 years for fear of magnitude of an expense that has only a 3% likelihood of happening.

Is there a way to get details of Medicare expenses like you can get with SS income?

I haven't read all the comments yet but:
I am in Mediare coverage now and also licensed in a few states (not yours) and It's possible to get Mediare Advantage plan for zero premium (to the insurance company) . You still need to pay Part B premium (to the Gov't/ medicare).

A lot of FPs that sell stocks don't like Annuities since they only get paid once while "assets under management" gets them paid a percentage every year even if you lost money.
Not saying anything about your personal FP, he may have many reasons.

Long Term Care has become very expensive. They can raise the premiums along the way as well. My policy has experienced that. Medical costs have risen faster than predicted.
My parents got in early and had lifetime benefits and both got way more in benefits than premiums paid out. They don't sell those anymore for that reason.
If you have enough assets then you likely would "self insure" rather than spend your nestegg on a bet.
If you don't have assets it's moot since you can't afford it anyway and could end up on Medicaid or worse.

Sorry if I overstepped by not reading ahead.

 

[Janann]

I'm going to throw another long-term care insurance option out there for anyone who wants to fund the insurance with one lump sum payment. There is no need for a lot of critique here -- people can do their own research.

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If the person dies before using any of the policy for long term care, all of the payment plus more comes back as a life insurance payout. One way or another, the initial payment will come back to the policy owner or the estate.

Instead of one lump payment, the policy can be purchased over a few years for an additional fee.

 

[Timeshare Von]

If you are currently insured through your employer, you should be able to get a COBRA policy with your employer for the first 18 months after you quit your job. It would most likely be cheaper than buying a policy on your own. Also, you wouldn't have the hassle of switching policies and/or insurance companies until later.

COBRA can be very costly. My sister has been running the numbers as she considers quitting a job before she's eligible for Medicare. She will be far better off buying an ACA plan from the Marketplace than paying for COBRA for the year until she's going to be able to go on Medicare at age 65.

 

[Janann]

COBRA can be very costly. My sister has been running the numbers as she considers quitting a job before she's eligible for Medicare. She will be far better off buying an ACA plan from the Marketplace than paying for COBRA for the year until she's going to be able to go on Medicare at age 65.

Everybody needs to run the math. So far it looks like I'll be better off with COBRA. And if the price is close, COBRA is a lot simpler to deal with than switching to an ACA plan.

 

[Timeshare Von]

My personal opinion is that insurance companies/agents sell a lot of FEAR when marketing long-term care policies. Once your money (and other assets) are depleted, there are federal/state programs to take care of people. We have recently gone through the research with an elderly friend (86 years old) for whom we're POAs for. If/when he depletes what he has left (roughly $100k), he will receive financial assistance and able to remain in his senior living facility until he dies. His SS is relatively low so it has a minimal impact on his ultimate financial assistance available to him.

 

[Timeshare Von]

No pension, no interest on investments (they’re all in retirement accounts), no capital gains, no annuity, some $ in Roth IRA and 100% of our current turbo savings is Roth.

Yes to SS.

I think until I’m 73, I get to decide how much I take out of my retirement accounts?

Weirdly since we moved, my age 62 SS amount + Mr H’s will cover like 65-70% of our monthly expenses. I don’t think we’re going to be in the high income category for at least a decade. The basic point is our expenses are so low, not that we’re so rich that I can retire early.

Congrats on living a frugal lifestyle! That was the situation we were in too . . . and I retired before turning 65, and didn't start collecting SS until I was FRA (66.5). Hubby just retired over the summer at age 64 . . . and will start collecting SS "early" (before FRA), probably to coincide with starting Medicare next year. We don't have pensions coming, and we essentially self-funded our individual IRA retirement accounts throughout our 23 year marriage. We don't have a lot (around $600k combined) but we feel comfortable with our long-term financial plan.

Regarding our medical expenses, I've been very happy with Medicare (since November 2022) . . . and have a very good, no additional premium advantage plan. My out-of-pocket expenses (copays/deductibles/max out-of-pocket) are very reasonable . . . MUCH BETTER than my former insurance policies through the Marketplace. Now that we're on a more limited income, hubby's ACA Marketplace policy premiums have been subsidized (which will go away in 2026, unless Congress acts to extend). His policy, by our choice, has high out-of-pocket expenses, but we opted to do that to keep the premiums as low as possible this year in anticipation of his going on Medicare in May 2026.

All of that said . . . and done . . . and to your original question . . . based on our current medical insurance policies and known health issues, we budget $8,000 annually for our medical expenses (including the insurance premiums). For the past couple of years, that has been spot on for us. I anticipate as we get older, and insurance continues to shift financial burden to patients, we'll be looking at $10-12k in the near future . . . and probably $15k in 5+ years. It will of course continue to escalate, but at what rate . . . it is anyone's best guess.

 

[isisdave]

Right. And that's part of why I've been pulling $ out of IRA for last 21 months. But the question is whether there's any advantage to pulling even more out to fund a Roth. My understanding is that it doesn't matter, other than future gains in Roth would be untaxed.

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This won't apply to you because of the relatively large amount you've been withdrawing, but I offer it here for the benefit of others with similar IRA situation but who aren't tapping it yet.

You want to "use up" your standard deduction, which is $31,500 for a couple under 65 this year. If your Standard Deduction is more than your Adjusted Gross Income on your tax return, you could take the difference out of your traditional IRA without additional income tax. If you're over 65 and married, you get an additional $3200 Standard Deduction. Additionally, through 2028, if you're over 65 and your AGI is under $175,000, the recently passed tax law gives you each an additional $6000 Standard Deduction.

But the first non-zero tax bracket for married people is 10% on the first $23,200 of taxable income (AGI less deduction, generally), and the second is 12% up to $94,300. This is a fairly light bite for some, compared to what circumstances might cause later in life. [Don't forget to consider state income tax though.]

Also, in my observation, people worry too much too early about RMDs. They start at 3.77% annually at age 73, and don't exceed 5% before age 81. So that's around $20,000 [sorry ... decimal place error, and I was actually thinking about the TAX on the RMD when I first typed this] if you have $500k in your traditional IRAs, and if you have more than that, your sailboat maintenance is costing you more, if you get my drift. When you pass 90, they start to be a lot more, but if I'm alive at 90 I think this'll be pretty far down my list of worries.

Others will have a different outlook, I'm sure, but I see a lot of worry about stuff that won't bother middle-income folks because they ARE middle income, and won't bother high-income folks 'cause they will be able to afford it.

 

[isisdave]

COBRA can be very costly. My sister has been running the numbers as she considers quitting a job before she's eligible for Medicare. She will be far better off buying an ACA plan from the Marketplace than paying for COBRA for the year until she's going to be able to go on Medicare at age 65.

COBRA can be costly, but part of that is because it has better coverage (lower deductible, co-pays, and out-of-pocket limits) than ACA plans. Basically it's your company's plan, only now you're paying for it yourself.

ACA has been getting government subsidies but I understand they're being ended, or at least phased out, and premiums are expected to spike in 2026.

So it's the old USA Crystal Ball program: how healthy do you think you're gonna be until you hit 65, and what will happen if you're wrong?

 

[rapmarks]

This won't apply to you because of the relatively large amount you've been withdrawing, but I offer it here for the benefit of others with similar IRA situation but who aren't tapping it yet.

You want to "use up" your standard deduction, which is $31,500 for a couple under 65 this year. If your Standard Deduction is more than your Adjusted Gross Income on your tax return, you could take the difference out of your traditional IRA without additional income tax. If you're over 65 and married, you get an additional $3200 Standard Deduction. Additionally, through 2028, if you're over 65 and your AGI is under $175,000, the recently passed tax law gives you each an additional $6000 Standard Deduction.

But the first non-zero tax bracket for married people is 10% on the first $23,200 of taxable income (AGI less deduction, generally), and the second is 12% up to $94,300. This is a fairly light bite for some, compared to what circumstances might cause later in life. [Don't forget to consider state income tax though.]

Also, in my observation, people worry too much too early about RMDs. They start at 3.77% annually at age 73, and don't exceed 5% before age 81. So that's around $2000 if you have $500k in your traditional IRAs, and if you have more than that, your sailboat maintenance is costing you more, if you get my drift. When you pass 90, they start to be a lot more, but if I'm alive at 90 I think this'll be pretty far down my list of worries.

Others will have a different outlook, I'm sure, but I see a lot of worry about stuff that won't bother middle-income folks because they ARE middle income, and won't bother high-income folks 'cause they will be able to afford it.

Thanks for this information, it really summarized it quite well.
One thing about your IRA is that in a good market, you can take your distribution, the market goes up, and you still have the same amount in your IRA.

But I think your distribution numbers are a little off, my IRa is way under the amount you used, and I have to take more than $20000 out

 

[Timeshare Von]

COBRA can be costly, but part of that is because it has better coverage (lower deductible, co-pays, and out-of-pocket limits) than ACA plans. Basically it's your company's plan, only now you're paying for it yourself.

ACA has been getting government subsidies but I understand they're being ended, or at least phased out, and premiums are expected to spike in 2026.

I understand about COBRA, as I'm an HR professional and have administered COBRA benefits for former employees in the past. BUT not all company insurance plans are very good so it is not accurate to say (or imply) it is better coverage.

And ACA premiums spiked this year . . . and yes with subsidies scheduled to end after 2025, unless Congress extends them.

 

[rickandcindy23]

We stayed with the Denver Fire health plan and have Medicare. We were told by our good friend who was a Denver cop that we are overpaying for our plan because we are tied to the fire department's plan, and we could save a few hundred $$$ a month, if we go with Kaiser on our own. He did it, and he is much happier.

I am sort of stuck with this idea that things will change (for us), if we go that route, and so I am not really sure if this is a good idea or not. Next month we will meet with a Kaiser rep and ask that question.

 

[Luanne]

We stayed with the Denver Fire health plan and have Medicare. We were told by our good friend who was a Denver cop that we are overpaying for our plan because we are tied to the fire department's plan, and we could save a few hundred $$$ a month, if we go with Kaiser on our own. He did it, and he is much happier.

I am sort of stuck with this idea that things will change (for us), if we go that route, and so I am not really sure if this is a good idea or not. Next month we will meet with a Kaiser rep and ask that question.

I would never go with Kaiser. My daughter was with them at one point through the company she was working for and couldn't wait to get off them.

I am probably turned off as a friend of mine had a horrible experience with them when treating her scoliosis and she ended up worse than before.

Both of those experiences were in the San Francisco Bay Area where the Healthcare is very good.

 

[Panina]

I think you will be ok. I retired even earlier.

Keep in mind IRMAA is calculated based on your MAGI, which includes income like wages, taxable interest, dividends, capital gains, and distributions from traditional IRAs and 401(k)s. Only Roth IRA's do not count. Conversions from traditional IRA to a Roth IRA does count. Your monthly Medicare and drug plan premiums can go up significantly if you go over but the good news is a married couple can make up to $212,000 who files jointly before it goes up. Each year it could be a good idea to covert traditional IRA to a Roth IRA if you are under the income limit.

I think the only caveat is if one of you ends up needing long-term care. It can spend down your assets very quickly. Medicaid would eventually pick the bill up, allowing the other spouse to keep their home car and some savings which varies by state but averages in the 150 thousand range. I think that that's where a long-term care policy really worked if purchased years ago but that vehicle seems to be long gone in a way it could really help.

For me, I will eventually go to a CCRC independent living community that is an A type which will ensure that me, and my other half will be able to go elsewhere on campus for the same price as the monthly living expenses if either of us needs memory care, assisted, living or long-term care.

One final note, I stay on standard Medicare and I have a Medigap policy to cover the 20% Medicare does not cover. My personal feeling is where nontraditional Medicare policies many people are happy with, I have seen when major medical issues occur choice is not as vast for the specialist that you can choose to go see. I like having full control thus I stay on standard Medicare.

 

[b2bailey]

I'm responding specifically to the part about healthcare costs during retirement, specifically after you are covered by Medicare. I've always carried a Supplement Plan, at a cost of less than $150 / month. I'm willing to pay that for 3 reasons:
1. If I'm traveling anywhere in US, I can walk into any Urgent Care or ER knowing I'll be covered.
2. At home I can see any doctor -- no need for referral to a Specialist.
3. After minimal Annual Deductible -- less than $300 -- everything else is covered.

For example, in June I had a difficult reconstructive foot surgery.
(I had already met my annual deductible.)
I saw my surgeon of choice -- after researching online.
Still seeing a variety of payments made from Medicare & then Supplemental Plan.
Total bills = approx $250,000.

(How is that possible?)

My share = less than $100. I had a few $20 co-pays for surgeon, ect.

This did not include any overnight at hospital, it was "out patient".

My point is that your focus only needs to be on the cost of insurance during the years before YOU are eligible for Medicare. (If I remember, your husband will be eligible soon.)

To me, it sounds like you have resources available to cover these costs.

Thinking back, I don't know anyone who wishes they would have worked longer. (Well, one comes to mind -- but she has no resources other than social security.