Generation X: Factoring healthcare costs into retirement planning

pink-lesleyThis is the final blog in a three-part series exploring the economic history and future of Generation X. The series focuses on what this generation can do to prepare for retirement. In the first installment, we highlighted some of Generation X’s financial predicaments and, in the second installment, we discussed savings, pensions, and Social Security. The last blog focuses on Generation X and healthcare.

Many of us Generation Xers are not factoring healthcare costs into our retirement planning, which is a mistake. As healthcare expenses continue to rise and as we age, having a plan in place makes sense.

The cost of healthcare in the United States is increasing every year. According to the most recent Milliman Medical Index, in 2015, the cost of healthcare for a typical American family of four covered by an average employer-sponsored preferred provider organization (PPO) plan was $24,671. Healthcare costs for this typical family have more than doubled over the past decade.

To combat rising healthcare costs, there is something Gen Xers can do now—start a health savings account (HSA). An HSA has several tax advantages. The money isn’t taxed on the way in and grows on a tax-deferred basis. Additionally, it can be withdrawn tax-free when used to pay for qualifying medical expenses both at present and in retirement.

What many people—including Gen Xers—don’t realize is that an HSA could be an investment option relating to medical costs in retirement. Medicare doesn’t cover all healthcare costs, like nursing home and assisted living expenses. HSAs could be useful when paying for medical bills and paying for long-term care. But Gen Xers should also consider whether it is better to save money for long-term care in an HSA or buy a long-term policy. Doing the due diligence on the options now can save money down the line.

According to Dawn Helwig, a principal at Milliman, it is smarter to buy a policy sooner rather than later. As she said in a 2014 Wall Street Journal article, “For each year applicants in their 50s delay buying coverage, carriers typically raise premiums by 3% to 4%, simply because they are a year older….” Helwig also noted that those who wait to buy this insurance may encounter higher premiums down the line because carriers are dealing with losses on existing policies. With those losses, they have raised premiums between 4% and 8%.

Another option that we Gen Xers can consider when we reach retirement age is rethinking Medicare plans. Medicare itself has four parts: hospital insurance (Part A), medical insurance (Part B), Medicare Advantage plans (Part C), and prescription drug coverage (Part D). At age 65, most people are automatically enrolled in Medicare. But Medicare doesn’t cover everything, and participants must pay copayments and deductibles.

Those who have Medicare Parts A and B can decide to receive all their healthcare services through a provider organization under Part C, also known as Medicare Advantage. Most Medicare Advantage programs have low monthly premiums, and they cover all of the services offered under original Medicare except hospice. To determine whether Medicare or Medicare Advantage is a better option financially, it is important to compare and contrast the costs associated with each one.

As one Gen Xer says, “My parents got to think about what they wanted to do at 65. I don’t have that option. We are running into something that our parents didn’t have to deal with.”

Clearly, Generation X hasn’t had it easy and faces numerous challenges on the way to retirement. But by doing some research and planning for the long term, we might just be okay.

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