In 2009, approximately 1.5 million Americans filed for bankruptcy. Most of them were well-educated, middle-class homeowners, just like you. Do you know what caused most of those bankruptcies? It wasn’t a fancy adjustable rate mortgage or a financial crisis backlash. According to a study published in the American Journal of Medicine in August 2009, more than 60% of bankruptcies are rooted in medical bills.
“Unless you are a Warren Buffett or Bill Gates, you are one disease away from financial ruin in this country,” says Harvard researcher and lead author Steffie Woolhandler, MD. Or, as one of my clients, a doctor, told me, “You’re just one step away from the banana peel!”
The bottom line is that financing the rising costs of health care is almost certainly one of your biggest risks, if not the biggest, in retirement. And since we know that it is very difficult to take effective action once you are already in a financial crisis, it is important that you answer the following questions before you quit.
If you plan to retire before age 65 …
1. Have you withdrawn health care benefits available through your employer or union? Is it available just to you or to you and your dependents?
If you are among the few who have withdrawn profits, count your lucky stars. According to a Report in the February 2003 Employee Benefits Research Institute, only 12% of private companies in the United States offered retiree health care benefits. That number is expected to continue to decline in the future due to rapidly increasing costs.
Even if you have coverage, remember that not all plans are good plans, nor are they necessarily affordable. You should also know, as an early retiree, that your employer is not required to continue to offer you coverage and can discontinue the plan at any time.
2. Do you have any pre-existing conditions that may affect your ability to obtain coverage?
This is an especially important question for those who will enter the private insurance market. Individual insurance goes through a medical underwriting process. If you are uninsured due to a chronic illness or condition, your only option may be the high-risk state pool, which is generally very expensive.
3. Have you examined the relative merits of all your options?
For example, someone with retired coverage may also be eligible for COBRA and private insurance. It is important to look at the benefits available under each policy and their relative costs. What is the lifetime maximum? Are there survivor benefits? What are the out-of-pocket expenses?
Another issue to consider is the possibility of a change in health status. If you are not eligible for retiree benefits, COBRA might be a good option, for 18 months, to close the gap until you are eligible for Medicare. But if COBRA doesn’t make you eligible for Medicare, you’d better purchase private coverage now, assuming you qualify, to cover the risk of illness arising in the 18-month period that makes you uninsurable.
4. Do you know when and how to enroll in Medicare?
Even if you are eligible for retiree benefits, your company will require you to enroll in Medicare at age 65. At that point, the retiree policy generally becomes the second to pay. If you receive Social Security benefits before age 65 (which we do not advise), you will automatically be enrolled in Medicare Part A. You must choose whether to enroll in Parts B, C, and D.
If you delay Social Security benefits, you will need to contact Social Security sometime during the three months before your 65th birthday to enroll. You absolutely don’t want to miss out on the initial enrollment period, which begins three months before your 65th birthday, includes the month you turn 65, and ends three months after that birthday.
5. Have you purchased long-term care insurance?
While a serious illness or injury has the potential to generate medical bills in the hundreds of thousands of dollars, long-term care has the potential to cost millions over a period of ten to twenty years. Hopefully you’ve done this much sooner, but if not, as long as you’re healthy enough to qualify for a policy, this is a must.
Almost 40% of those who need long-term care are under the age of 60. Our general rule of thumb is that all clients, age 40 and older, with less than $ 3.5 million in assets to invest must have a long-term care policy. This is not negotiable. Over $ 3.5 million, we still think it’s advisable.
1. Again, are you or your spouse eligible to receive retirement benefits through your employer?
Be sure to review the cost and benefits. The employer plan will be the second to pay after Medicare. If it’s a good plan, which not all are, it may make sense to use your employer-sponsored plan as a supplement to Medicare. Otherwise, you will want to purchase a separate Medicare supplement policy during the open enrollment period.
2. Have you purchased long-term care insurance?
The longer you wait to buy long-term care, the more expensive it will be and the more likely you are to have a condition that raises your premiums or makes you totally unsuspected. The ideal age for long-term care is 40. But the next best time is now. When you turn 65, there is a 70% chance that you will need at least some long-term care at some point in your life.
3. Do you understand Medicare’s enrollment procedures and deadlines?
It’s important to go through the Medicare enrollment process right away to avoid a gap in coverage. A gap in coverage can result in higher premiums for the rest of your life. Also, pre-existing conditions, which are not taken into account as long as there is no coverage gap, enter the equation if you do not enroll immediately before age 65. Lastly, Medicare supplement insurance, as long as it is purchased within six months of your 65th birthday, is also not subject to underwriting, but will be if purchased outside of the open enrollment period.
4. Do you know where to get help with questions about health care coverage and strategies to cover costs?
There are many public resources available. Most state Insurance Departments have a lot of helpful information available on their websites, as does the Social Security and Medicare Administration. Private counselors can also help. Possible resources include your employer or union’s Benefits Department, insurance consultants, and retirement planners.
Don’t wait until retirement creeps up on you to start looking for answers to these questions. Remember that a large percentage of Americans are forced to retire earlier than planned. So do your homework and if you need help ask a qualified source.
No statement in this article should be construed as a recommendation to buy or sell a security or to provide investment advice unless specifically stated as such. All investments involve risks, including the possible loss of capital.