O N H E A LT H C A R E
Helping you spend wisely on health care Adding up your health care expenses How to plan for rising health care costs 6 key Medicare questions
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Want to feel better this year? Think about resolving to pay down your debt.
Among those who paid off a debt during the previous year:
have less stress
Fidelity Investments Life Decisions Research, a survey of 9K+ DC plan participants recordkept by Fidelity and who are employed full time. Survey conducted October 2016. Participants were asked to identify the most impactful event in their life over the past 12 months, as well as the effects it has had on various aspects of their life.
have better overall satisfaction with life
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Welcome message Navigating the health care system, and even your employer-sponsored benefits, can be expensive,
Can your employee benefits help reduce your expenses?
6 key Medicare questions
Adding up your health care expenses, from A to Z
How to plan for rising health care costs
Where to save your money for the long term
Annual enrollment trip planner
Getting your HSA in shape
complicated, and full of jargon most people just don’t understand. We want to help. With decades of experience helping people build their savings, we understand how difficult it can be to get ahead. With rising health care costs, the job of saving is getting a lot harder. But who wants to skimp on their health care? In this magazine, we offer tips on how to reduce health care expenses, basics about how health savings accounts (HSAs) work, and even some of the ins and outs of Medicare. We are trying to “uncomplicate” health care and help people get the most out of their health care spending so they can live the lives they want. — Fidelity
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WORKE R S SAY H E A LTH C A RE I S TH E MOS T C RITIC A L I S S U E I N TH E U N ITE D S TATE S
Source: Fronstin, Paul, “Workers Rank Health Care as the Most Critical Issue in the United States,” EBRI Issue Brief, Sept. 24, 2018.
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Can your employee benefits help reduce your expenses? BY K A L I H AW L K W I T H N E WSC R ED
If you find yourself stretching your paycheck to cover all your expenses, it’s time to look at creative ways to make sure those expenses don’t match or exceed your income. And there’s one oft-overlooked option that may be able to
Health insurance and related savings accounts Don’t assume that the health insurance plan you have right now will always be the most cost-effective option for you and your household. Take the time to evaluate health insurance options during open enrollment each year and consider how to get the most out of the money you spend. That might mean considering an HSA-eligible health plan this year, which can help you reduce your monthly premiums and give you access to a health savings account (HSA). HSAs are powerful tools because they’re the only health-specific accounts that let you contribute money tax-free, invest and generate earnings from your contributions tax-free, and withdraw the money to use on qualified health care expenses tax-free.* Depending on your situation, you might want to consider making use of a flexible spending account (FSA) instead. FSAs are similar to HSAs in that the money you contribute to the account is free from taxes when used for qualified health expenses. The big difference between an HSA and an FSA is that FSA money is typically “use it or lose it” within the calendar year.
help you do just that — your employersponsored workplace benefits. This is a good time to make sure you fully understand the benefits offered to you by your employer and to check to see if they can help you reduce your expenses.
Retirement plans There are many advantages of contributing to an employer-sponsored retirement plan like a 401(k), 403(b), or SIMPLE IRA. Say, for example, your employer will fully match your 401(k) contribution up to 3%. If you make $60,000 per year and contribute that 3%, it means you’ll put $1,800 into your account — and your employer will also put in $1,800.
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If your company offers to match your contributions up to a certain percentage, take advantage of the help. Don’t leave that money on the table. Contribute at least enough to get the match.
Continuing education Depending on your job and responsibilities, continuing education might be an important investment to make in your future. But before you spend your own money on courses, trainings, or events (and travel to and from them), check to see if you have options for professional and personal development. Even if there’s nothing specific included in your benefits, reach out and talk to your manager or company leadership. Ask about options for continuing education, and see if you can negotiate support from the company before you make a financial investment on your own.
Child care and other lifestyle benefits Does your company have on-site child care that would cost less than the private day care your kids currently attend? What about a gym somewhere in the building that you can access for free (instead of shelling out hundreds for a boutique place down the street)? Here’s where you can look at your existing expenses and see if there are cheaper (or free) alternatives available within your benefits package.
Insurance policies Your employer likely offers some sort of life insurance and disability insurance. If the policy your employer will cover for you sufficiently meets your needs, take advantage — especially if they’re paying the premiums! Avoid paying for an overlarge policy on your own and adding to your monthly expenses. Sign up for coverage through your employer.
Reimbursements Finally, make sure you claim any reimbursements you’re entitled to as an employee. Learn the correct process for tracking expenses and receipts as well as submitting requests for reimbursement. Don’t pay out of pocket when your company is willing to pay you back.
At the end of the day, don’t assume that you’ve discovered every valuable element of your employee benefits package. Reach out to your HR department or the individual who handles HR for your company, request a list of the benefits offered to ensure you’re taking full advantage, and review it in full to see how using company benefits can help you avoid adding to your expenses. *With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation. The triple tax advantages are only applicable if the money is used to pay for qualified medical expenses. The statements and opinions expressed in this article are those of the author. Neither Fidelity Investments nor your employer can guarantee the accuracy or completeness of any statements or data. Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
Stressed out? You’re not alone Throughout life, most people experience a fair amount of stress — and much of it is financial. The top causes of stress:
What you can do People without an emergency fund are twice as likely to be highly stressed as those who have any amount of emergency savings. Percentage who frequently feel stressed or anxious in general:
Percentage who are highly stressed about their finances:
35% Fidelity Investments Total Well-Being online survey of 9,315 active Fidelity 401(k) and 403(b) participants, September 2017.
Fidelity recommends having 3–6 months of expenses saved in an emergency fund, but you don’t have to get there overnight. Just try saving a little at a time — and make it automatic if you can, directing a little from every paycheck into your emergency savings.
Adding up your health care expenses, from
Do you know how much you really spend on health care? Sure, you can add up your premiums and doctor’s visit
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The first step you’ll want to take is to compile information about all of your family’s health care spending in one place. You may want to think about saving medical bills throughout the year, getting records from your care provider, or using information from your drugstore’s rewards program. Ready to get started? Here’s your checklist of items to consider when adding up your total health care costs in the last year.
DOC TOR ’S V I S IT S
coinsurance, co-pays, and any other out-of-pocket costs
E Y E H E A LTH
exams, glasses, contacts
co-pays, month over month, which can give you a pretty good
M E NTA L H E A LTH S E RV IC E S
PRE SC RI P TION DRU G S
like therapy appointments
DE NTI S T A N D OR THODONTI S T A PPO I NTM E NT S A N D COS T S
S M O KI N G C E S SATION PROG R A M S
OV E R-TH E - CO U NTE R PRO D U C T S FRO M TH E PH A RM AC Y
W E LLN E S S OR W E IG HT LOS S CO U N S E LI NG
picture of how much you and your family spend on your health care. But as open enrollment approaches and you’re preparing to choose the right benefits for you and your family, there are more costs you might not be considering. Why go to the effort of adding it all up? It’s always a good idea to have a holistic picture of how much you’re spending on health care when you’re setting your family’s budget for the coming year. When you total all the unexpected costs, you may be surprised — and you’ll definitely be able to make a more important decision when it comes time to enroll in your benefits. The statements and opinions expressed in this article are those of the author. Neither Fidelity Investments nor your employer can guarantee the accuracy or completeness of any statements or data.
FITN E S S C L A S S E S OR GY M M E M B E R S H I PS
like dietary supplements, orthotics, first aid materials, or acne treatment
So, what comes next? Sit down with any other decision makers in your family and discuss your health care spending. What changes do you want to make to your budget and spending this year? Do you want to stick with last year’s plan, or switch it up this year? Remember to account for any big expenses you already know about, like if someone in your family is having surgery or having a baby. Decide if there are other benefits — like vision or any financial accounts — that you could take advantage of. And don’t forget the importance of life and disability. You’ll be going into the next year more prepared, and better educated, about your own health care needs and those of your family.
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Where to save your money for the long term How to make the most of your 401(k) and HSA
T WO G RE AT C HO IC E S FOR LONG -TE RM SAV I NG
Your HSA and 401(k) Your job may give you access to two tax-advantaged savings and investment accounts that help you save for the long term: a workplace retirement plan, such as a 401(k), and an HSA for qualified medical expenses. You are eligible to open a health savings account if you are enrolled in an HSA-eligible health plan, typically a high-deductible health plan.
Where do you start? Consider contributing enough to get your full employer match in your 401(k), and set aside enough for this year’s medical expenses in your HSA. Your 401(k) We recommend saving at least the equivalent of 15% of your income for retirement, including your employer’s contribution, throughout your career. To get there, a good starting point is to make sure you are contributing enough to take full advantage of any contribution your employer offers. In most cases, that contribution is a match — if you don’t contribute, neither do they.
GETTING STARTED Having access to both a workplace retirement savings plan like a 401(k) and a health savings account (HSA) gives you the opportunity to set aside a lot of money every year. If you can’t afford to max out your contributions to both accounts, how do you decide how much to allocate to your 401(k) and how much to set aside in your HSA? And why does it matter, today and for the future? Let’s explore the answers.
STEP 1 TA KE C A RE OF TH E BA S IC S
The law limits how much you can contribute to each account. In 2019: 401(k) Maximum contribution
Catch-up (age 50+)
One in five employees doesn’t contribute enough to meet their 401(k) match.1 Well, I can’t leave that on the table!
HSA Individual maximum
Catch-up (age 55+)
If you can max out your contributions to both accounts, great! But if you can’t afford to set aside that much, we can help you decide how to allocate your money.
What if your employer doesn’t offer a 401(k) match? Aim to contribute enough in your HSA to cover your expected medical expenses (or up to your deductible if you aren’t sure).
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STEP 2 M A X O U T YO U R H SA
Your HSA It’s also important to set aside at least enough to cover this year’s medical expenses in your HSA. This amount includes any contribution your employer makes to your account. Most people spend at least some money on health care every year, whether it’s a visit to a walk-in clinic or something more serious. Think about how much money you spent last year, and try to contribute at least that amount to your HSA. Otherwise, you’ll potentially be giving up a tax break and paying more for health care than you need to. For example, it
would be like sending an additional $100 to the federal government for every $400 bill you have to pay for qualified health expenses. (Just to keep it simple, we’ve assumed a 20% effective federal income tax rate throughout.) If you’re not sure how much you spend on health care, consider contributing the amount of your deductible to your HSA as a starting point. If you don’t spend it all this year, you won’t lose it — that’s one of the benefits of saving in an HSA; the money is yours until you need it, even if you change jobs.
With our daredevil kids, we always hit our deductible. We’ll start with $3,000. I didn’t spend much last year. Just one visit to a walk-in clinic. I’ll start with $500, just to be safe.
If we didn’t use the HSA, we’d also have to pay hundreds of dollars in taxes on that money.
Once you’ve saved enough to get your employer match in your 401(k) and cover your health care expenses in your HSA, you can focus on maxing out your HSA. Why not put more money into your 401(k) next? Because your HSA is a powerful tool to help you save for retirement. Your HSA and 401(k) have the same tax advantage when you put the money in — you trim your federal income tax bill this year. But they are not the same when you take the money out. With a 401(k), you pay federal income tax on the money when you withdraw it, no matter what you use it for. With an HSA, you don’t owe federal income taxes on withdrawals, as long as you use them for qualified medical expenses. It’s the triple tax advantage.2
Contributions are tax-free.
Any growth to your savings will be tax-free. You can even invest your balance until you need it.
If you have access to a limited-purpose flexible spending account, consider contributing enough to pay for current eligible medical expenses after you max out your HSA. You will likely have to use the money you contribute each year, but it will allow you to save your HSA for the future.3
Withdrawals are tax-free as long as you use them to pay for qualified medical expenses.
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This doesn’t include spending on long-term care.5 This total is 75% higher than it was in 2002.4
is what a couple retiring in 2018 can expect to spend on health care during retirement.4
of the money today’s retirees spend is for health care. 5
If you need to net $10,000 to pay for qualified medical expenses, you would need to take more out of your 401(k) than your HSA to account for taxes.
Saving for retirement
For illustrative purposes only
W H AT I F TH AT’S YO U R PRI M A RY GOA L?
If your primary goal is to save for retirement, the HSA is a great way to do that, for three important reasons: 1. You could spend a lot on health care in retirement. If you’re one of the lucky ones who doesn’t have big medical bills in retirement, you can use your HSA savings for general expenses after age 65. Because these are considered nonqualified withdrawals, they are taxable. 2. Money from your HSA will go further in retirement, thanks to the tax break. 3. Once you reach age 65, you can spend your HSA balance on anything — even general expenses. If you are lucky enough that you don’t have big medical expenses in retirement, there’s no penalty. You simply pay federal income tax on the withdrawals you make to pay for general expenses.
Pay qualified medical expenses from your HSA
Pay other expenses from your HSA
Pay any expenses from your 401(k)
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CONTRI B U TE MORE TO YO U R 4 01(K )
Once you’ve maxed out your HSA contributions, focus on contributing up to the maximum in your 401(k) as well. Once you get there, congratulations! You’ve made the most of your workplace savings. Here’s how it looks when you put it all together:
Contribute to your 401(k) up to the match, and put enough money in your HSA to cover current expenses.
2 Your employer’s match
Max out your HSA to get the triple tax advantage.
3 Contribute as much as you can to your 401(k), up to the max.
For illustrative purposes only
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money. Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation. 1. Fidelity analysis of 2.6 million participants contributing to 401(k) plans that offer an employer matching contribution as of March 31, 2017.
2. With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation. The triple tax advantages are only applicable if the money is used to pay for qualified medical expenses. 3. A flexible spending account is only available through your employer, and these accounts are typically subject to the use-it-or-lose-it rule: You can contribute up to $2,650 annually, but any money left in the account at the end of the year could be lost. Your employer may allow a grace period for spending down your account at the beginning of the following year, or may allow up to $500 to be rolled over. Despite the drawback, using an FSA to pay for some health care costs can help you save. Money goes into the account pretax, and withdrawals are tax-free when used to cover qualified expenses.
4. Estimate based on a hypothetical couple retiring in 2018, 65 years old, with life expectancies that align with Society of Actuaries’ RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP-2016. Actual assets needed may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes: cost basis is assumed to equal market value. Estimate is calculated as the assets required today in a taxable account with an effective tax in retirement of 5%, an asset allocation of 30% equity, 50% bonds, and 20% cash, such that there is a 90% chance of being able to pay for health care expenses through life expectancy. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing
provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care. 5. Fidelity analysis of Bureau of Labor Statistics 2016 Consumer Expenditures Survey data for Medicareeligible households (age 65 or older). This analysis does not include the cost of long-term care for older retirees.
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Getting your HSA in shape
Your HSA can go the distance — from now through retirement.
After age 65, you can spend your HSA balance on more than just qualified medical expenses.
Endurance, strength, flexibility, and balance are all key
You can make your HSA work harder for you by investing the balance.
Your HSA doesn’t just help you save for the future. It helps you save on taxes today.
H E A LT H SAV I N G S ACCO U N T BA S I C S
components of a good workout. It may surprise you, but a health savings account is similar. Like any routine, you have to understand the moves and be consistent to see results.
of account holders don’t know their unspent HSA balance carries over from year to year.1
HSAs can go the distance
Investing can make your m oney work harder for you
If you have money left over in your HSA at the end of the year — you keep it. Even if you change jobs, your HSA is yours. You can save it until you need it — even if you don’t need it until retirement.
As your HSA grows over time, consider investing the part of your balance you don’t expect to use. Choose an investment that matches your time frame; the longer you want to save the money, the more aggressive you can be.
of account holders don’t know they can invest their HSA balance in mutual funds and other securities.1
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Your HSA can help you pay for more than just health expenses
Balancing the costs with savings
If you tap your HSA for anything other than qualified medical expenses after you turn age 65, income taxes will apply, but there is no penalty.2
The money you contribute to an HSA lowers your taxable income this year, but that’s not the only benefit. Only 13% of people are taking full advantage by contributing the maximum allowed to their HSA.1 • M oney isn’t subject to federal income tax in the tax year it’s contributed. • The balance grows tax-free.
of account holders don’t know HSA money can be used for general
• W ithdrawals are tax-free as long as the money is used for qualified medical expenses. 3 If you want to contribute more to your HSA, you can change your contribution at any time — not just during annual benefits enrollment.
expenses after age 65.1
don’t know about all three t ax advantages
of an HSA.1
1. CARAVAN® Survey conducted online among a demographically representative U.S. sample consisting of 5,133 adults, 18 years of age and older. Interviewing for this CARAVAN® Survey was completed Dec. 9–21, 2016, by ORC International, which is not affiliated with Fidelity Investments. 1,309 respondents enrolled in an HSA-eligible health plan were included in the analysis. The results of this survey may not be representative of all adults meeting the same criteria as those surveyed for this study. 2. HSA distributions are exempt from a 20% federal tax penalty when used for nonqualified medical expense purposes after age 65, but they are subject to federal income taxes. State laws may differ. Consult a tax advisor regarding your specific situation. 3. With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation. The triple tax advantages are only applicable if the money is used to pay for qualified medical expenses.
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key Medicare questions Getting on top of your Medicare choices can have a major impact on your readiness to retire. To get started, here’s a quick rundown of the questions most frequently asked about retiree health care — with answers you’ll find at the Social Security and Medicare sites.
The Decision: M ORE TH A N
of those who retired before age 65 stopped working earlier than planned; many because of a health issue or a work event.
1. When am I eligible? Normally, your health insurance coverage under Medicare begins when you reach age 65. However, you also may be eligible for Medicare at any age if you have certain qualifying disabilities. It is often a surprise that you enroll in Medicare only for individual coverage. There is no “family” coverage with Medicare, so your spouse or partner will not be covered by your Medicare plan and is required to enroll on their own when they reach Medicare age. TI P: If you have a younger spouse or partner, they
won’t be able to enroll in Medicare when you do. If they lose health insurance prior to age 65, they can seek coverage on their state’s health insurance exchange or in the private market.
When you do become eligible, you’ll want to remember to sign up within the 7-month time frame that begins 3 months before the month you turn age 65 and ends 3 months after the month you turn 65. If you miss this initial deadline, called the Initial Enrollment Period, you may have a big gap in coverage. You’ll have to wait until the next General Enrollment Period from January to March to sign up. Your coverage won’t be effective until the following July, and you’ll likely incur a permanent penalty that increases your premiums. The exception is if you’re still working when you’re age 65 and get health insurance through your employer or your spouse’s employer. You don’t have to enroll right away, as long as you can prove that you had this coverage when you sign up later on.
2. What are my choices? While the decisions you need to make are similar to what you may be used to with employer-provided
of early retirees get health insurance coverage through an employer-sponsored plan or COBRA.
health insurance, the structure of the Medicare health insurance program is very different. Not only are there different categories of insurance to sort out, but there are many options within each category. Here’s a quick rundown: Part A: Hospital insurance Medicare Part A coverage was first introduced in 1965 to help seniors manage the high cost of hospital care. After you pay an annual deductible, this insurance kicks in during your “benefit period”1 to pay for hospital stays, certain treatments and procedures performed in the hospital, care at a skilled nursing facility, and hospice care. Part B: Medical insurance Medicare Part B was designed to pay for many of the health care costs not covered by Part A, including doctor visits and services, outpatient hospital care, physical and speech therapy, lab tests, blood transfusions, medical equipment and supplies, and ambulance services. There is a standard monthly premium that each individual pays, and it increases for higher income households. M E D IG A P (S U PPLE M E NTA L ) POLIC I E S
You may have other health care costs that won’t be covered by either Part A or Part B of Medicare, such
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as deductibles and co-pay amounts. Unless you have other health insurance — for example, if you are a veteran, a union member, or a retiree with an employer health benefit — you may want to consider purchasing a policy that gives you the extra coverage you may need. To supplement Medicare Parts A and B, you can purchase a “Medigap” policy. Medigap policies are offered by private insurance companies, and there are a variety of plans to choose from, based on the services you would want to have covered. A LTE RN ATI V E I N S U R A NC E W ITH A M E D IC A RE A DVA NTAG E PL A N
With Medicare, you can purchase an all-in-one managed care Medicare Advantage plan that provides your Part A and Part B coverage, gap coverage for many other services, plus costs that are not covered under Parts A and B, and may include Part D prescription drug coverage (explained below). Most Medicare Advantage plans provide coverage only for in-network providers for non-emergency services. The type of plan you choose depends on what types of services you want to include (such as eyeglasses or dental care) and whether you prefer to choose your own doctors or health care facility.
Part D: Prescription drug coverage Prescription drug coverage is not included in the original Medicare (Parts A and B) or Medigap supplemental policies. So unless you have this coverage elsewhere — or it’s already included in your Medicare Advantage plan — you may want to think about buying a Medicare Part D policy to help pay for your prescription medications. The plan you select for Part D coverage may depend on whether the plan includes the types and doses of medications you need (and how these fit with their formulary), how frequently you need them, and what pharmacy you use.
3. How do I choose my
Medicare supplement options? Begin by looking at the coverage you have now with your current health care provider and deciding what you want to duplicate or change. Then consider these questions to help narrow your choices: • H ow much can I afford to spend on monthly premiums? • What benefits do I really need? • D o I want to choose my own doctors or health care providers?
The Calculation: OF THOS E W HO PL A N N E D TO RE TI RE E A RLY,
said access to health care coverage played an important role in their decision. said they calculated their expected costs.
• D oes the plan include coverage for my unique situation? (Paying for emergencies outside the U.S. may be important if you travel frequently.) • H ow does the plan’s cost compare with that of other plans with the same benefits? You can go to www.medicare.gov to find out which insurance companies sell supplemental Medigap or Medicare Advantage policies in your state.
The Cost: MOS T PAY LE S S TH A N
$500/month FOR COV E R AG E
4. What do the plans cost? Part A As long as you or your spouse (or ex-spouse) paid Medicare taxes for at least 40 quarters, your basic Part A coverage is free.2 But you are still responsible for paying an annual deductible (which is $1,340 in 2018), and a portion of the expenses for hospital stays that last longer than 60 days or nursing home stays beyond 100 days. Individuals who don’t qualify for free Part A coverage because they did not pay Medicare taxes long enough can generally purchase this coverage for an additional cost. Part B The cost (premium) for Part B is set by Medicare each year at a fixed rate for most participants ($134 a month for 2018), but it increases for individuals with annual income over $85,000 and married couples with annual income above $170,000. The cost for these higherearning participants can range from $187.50 to $428.60 per month in 2018. Part B premiums also can be higher if you don’t enroll when you’re first eligible — tack on an additional 10% per year that you missed enrolling on time. As with Part A, you will pay an annual deductible for Part B ($183 in 2018). And some covered services
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require that you pay a percentage of the charges or a co-payment amount approved by Medicare — generally 20% of these costs are paid out of your pocket. If you are already receiving Social Security benefits, payment for your monthly Part B premium is deducted directly from your Social Security checks. If you’re not yet collecting benefits, Social Security will send you a quarterly bill. M E D IC A RE A DVA NTAG E PL A N S
With a Medicare Advantage plan, you typically have a set premium, which includes your Part B cost, no (or low) deductibles, and co-pays for doctors, doctor’s office visits, and other services. Everyone who enrolls in the same Medicare Advantage plan pays the same premium, regardless of age, gender, or health status. Part D The amount that insurance companies charge for prescription drug coverage will vary widely, based on how they structure their deductibles and their co-pays, and the brand name and generic drugs that are covered. For higher income individuals and couples, you’ll pay more for Part D coverage (as well as Part B premiums). Premium surcharges range from $13 a month to $74.80 a month depending on modified adjusted gross income (MAGI) and marital status.
The Miscalculation: N E A RLY
of early retirees underestimate how much they are likely to spend on health care during retirement. Many have no idea how to estimate the cost.
M E D IG A P
M E D IG A P
Although the benefits offered under a Medigap or supplemental insurance policy are standardized across the United States, the premiums, deductibles, and co-payments for these policies can vary widely. So be sure to compare costs before you buy one. The cost of a Medigap policy may also depend on whether the insurance company offers discounts (e.g., for nonsmokers or for paying your premiums online), or a lower-cost option for using certain hospitals or doctors within the preferred network covered by the policy.
You can purchase a Medigap policy when you are first eligible for Medicare, or during the Medicare open enrollment period. Some insurance companies may allow the purchase of a Medigap policy at other times.
5. When and how do I sign up? Parts A and B Every eligible Medicare participant is entitled to receive Part A and Part B coverage upon reaching age 65, but you still need to sign up for your benefits. If you’re already receiving Social Security payments, you’ll be notified automatically. If not, you’ll need to contact your local Social Security office or go to www.socialsecurity.gov to request your ID card and benefits. M E D IC A RE A DVA NTAG E PL A N S
You may enroll in a Medicare Advantage policy during the same enrollment time frames that apply to Parts A and B. The annual open enrollment period for Medicare Advantage policies takes place every year from October 15 to December 7. Outside of this period, the government has a 5-Star Special Enrollment Period for Medicare Advantage plans and Medicare prescription drug plans. With this option, you can switch any time during the year except between November 30 and December 8. You can switch from your existing plan to a 5-star-rated Medicare Advantage Plan or a 5-star Medicare prescription drug plan as long as a 5-star plan is available in your area.
Part D If you’re new to Medicare, consider enrolling in a prescription drug plan during the initial 7-month enrollment period that begins 3 months before you turn age 65. If you sign up after that, your premium can increase for each month you delay. After you enroll, you can always change to a different prescription drug plan during the annual open enrollment period from October 15 to December 7.
6. Where can I go for more help? In addition to the resources offered by your State Health Insurance Assistance Program, or SHIP, check out the services, seminars, and publications available through your local Office of Elder Affairs or Council on Aging. The official Medicare site also has many helpful guides and interactive tools to help you compare your Medicare options. Having the right Medicare coverage is a key part of your retirement plan. There are many options to explore, so be thorough. 1. A benefit period is the way that Original Medicare measures your use of hospital and skilled nursing facility (SNF) services. A benefit period begins the day you’re admitted as an inpatient in a hospital or SNF. The benefit period ends when you haven’t gotten any inpatient hospital care (or skilled care in a SNF) for 60 days in a row. If you go into a hospital or a SNF after one benefit period has ended, a new benefit period begins. You must pay the inpatient hospital deductible for each benefit period. There’s no limit to the number of benefit periods. 2. Generally, you qualify for Medicare premium-free Part A when you’ve worked at least 10 years (40 quarters) paying Medicare taxes. Beneficiaries typically pay a Part B premium. If you haven’t worked and paid taxes for that long, you may have to pay a monthly premium for Medicare Part A, depending on your spouse’s age and how long he or she has worked and paid taxes.
EE OF RETIR
A G GOES TOW
Your health savings account can help you stretch your savings in retirement. If you tap your HSA for qualified medical expenses, your withdrawals will be free from federal income tax â€” unlike money you take out of your 401(k).
Investing involves risk, including the risk of loss. Fidelity analysis of Bureau of Labor Statistics 2016 Consumer Expenditures Survey data for Medicare-eligible households (over age 65). This analysis does not include the cost of long-term care for older retirees.
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How to plan for rising health care costs
If you are like most Americans, health care is expected to be one of your largest expenses in retirement, after housing and transportation costs. There are a number of drivers behind this mounting retirement health care cost challenge. In general, people are living longer, health care inflation continues to outpace the rate of general inflation, and the average retirement age is 62 for most Americans — that’s three years before you are eligible to enroll in Medicare. “Health care is creating a ‘retirement cost gap’ for many pre-retirees,” says Steve Feinschreiber, senior vice president of the Financial Solutions Group at Fidelity. “Although many assume their savings will cover all of their expenses in retirement, health care costs are often higher than anticipated. Many people assume Medicare will cover everything, but it doesn’t. The average 65+ year-old retiree today should expect to pay around $5,0001 a year on health care premiums and out-of-pocket expenses. So, you should carefully weigh all options.”
Health care: What’s your price tag? How much should you plan to pay in health care costs after you retire? According to the Fidelity Retiree Health Care Cost Estimate,2 an average retired couple age 65 in 2018 may need approximately $280,000 saved (after tax) to cover health care expenses in retirement. Of course, the amount you’ll need will depend on when and where you retire, how healthy you are, and how long you live. The amount you need will also depend on which accounts you use to pay for health care — e.g., 401(k), HSA, IRA, or taxable accounts; your tax rates in retirement; and potentially even your gross income. 3
Pre- and early retirees: Make the most of your time to prepare As retirement nears, you will have several big decisions to make, including when to stop working, when to take Social Security, how to pay for health care, and how to generate cash flow from your retirement assets. These decisions are interconnected and could make a difference in your living costs and lifestyle in retirement — and when you can retire. One-third of “early retirees” who claim Social Security at age 624 do so to help pay for health care expenses until they are eligible for Medicare coverage at age 65. But if you can postpone retirement or save enough to cover health care costs until 65, then you may be able to defer your Social Security benefits. Generally speaking, the longer you can wait until age 70 to take Social Security benefits, the more you can collect, assuming you live a long life.
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Turning age 65 and retiring: Consider Medicare and other options
Turning age 65 and still gainfully employed (or your spouse/partner is)
When you get close to age 65, spend some time reviewing and considering all your Medicare options. When you do become eligible at age 65, you’ll want to remember to sign up during your 7-month initial enrollment period that begins 3 months before the month you turn age 65. There’s a lot to learn about the world of Medicare. You’ll need to know about Medicare Parts A, B, and D, as well as Medicare Advantage and “Medigap” supplemental insurance plans. In brief, Part A covers hospital costs after you meet a deductible. Part B is optional coverage for medical expenses and requires an annual premium. Part D is for prescription drug coverage. Medicare Advantage plans are all-in-one managed care plans that provide the services covered under Part A and Part B of Medicare and may also cover other services that are not covered under Parts A and B, including Part D prescription drug coverage. Supplemental policies, referred to as Medigap policies, are offered by private insurance companies to supplement expenses that Medicare Parts A and B do not typically cover. “You need to consider the various factors to help make your decision. Look at the cost of annual premiums and co-pays at different levels of supplemental insurance. Compare these costs. Then factor in the number of visits and co-pay/coinsurance per visit that you anticipate for the next year. You may be better off paying a higher premium but not having to pay out of pocket at your office visits,” Feinschreiber advises.
If you’re still working when you’re age 65 and get health insurance through your employer or your spouse’s employer, you’ll have the opportunity to enroll in Medicare when you leave your employer plan through a Special Enrollment Period. In addition to Medicare options to consider, if your spouse or partner continues to work, they may be able to cover you through their health plan. Talk to your HR department to help you evaluate all your options, costs, and any restrictions. The rules of Medicare are complicated, so to get started, consider the following questions: • W hich plan offers you the best coverage for your health needs? • Y our employer is required to offer you coverage, but is that your best option? • Is it more expensive to stay in your employer plan or join Medicare? • C an your spouse or partner remain in your employer’s plan if you decide to leave? As you plan for health care expenses throughout your retirement — however long it may be — understand how paying for future health care expenses fits into your overall retirement income planning efforts because health care utilization tends to increase as we age.
AV E R AG E RE TI RE D CO U PLE AG E 6 5 M AY N E E D A PPROXI M ATE LY
saved (after tax) to cover health
expenses in retirement
of early retirees who claim Social Security at age 62 do so to help pay for health care expenses until they are eligible for Medicare coverage at age 65
1. Fidelity Benefits Consulting estimate; 2018. 2. Estimate based on a hypothetical couple retiring in 2018, 65 years old, with life expectancies that align with Society of Actuaries’ RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP-2016. Actual expenses may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other healthrelated expenses, such as over-the-counter medications, most dental services, and long-term care. 3. For investors with MAGI above $170,000 in the calendar year two years before the current year, and filing taxes as married filing jointly, Medicare premiums for parts B and D are increased. 4. Social Security Administration; https://www.ssa.gov/policy/ docs/ssb/v76n4/v76n4p1.html
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Trip planner Don’t go through open enrollment without a plan. Here’s a map for a direct route that also gives you time to make a few essential side trips along the way. 1
Your health plan
Does the health plan you chose last year still work for your family? If you have a choice of plans, take a few minutes to consider your options. Start by thinking about: • How much you pay toward the premium. • The annual deductible. • Co-pays for office visits and prescriptions. • Your employer’s contribution to a health savings account (HSA), if applicable. • Whether your doctor and hospital are in the plan’s network. We all had physicals last year at no cost.
We take two generic prescriptions.
Side Trip Your Health Care Needs In addition to comparing the plans themselves, it’s important to consider how much health care you actually use. Think about last year as a baseline, including your doctor visits, prescriptions, and diagnostic testing like x-rays and lab work. Think about whether you expect your needs to be similar next year. Then compare what your out-of-pocket costs would be under each of your plan options.
1. RE TI RE M E NT SAV I NG S
While you’re thinking about payroll deductions, take a moment to consider your retirement savings. To be financially ready to retire by age 67, aim to save 10 times (10×) your salary. Along the way, keep these savings benchmarks in mind for your milestone birthdays:1 1× at 30
The kids had a couple of issues — a sprained I had ankle and an ear the flu. infection.
3× at 40 6× at 50
I expect this year to be about the same.
8× at 60 To meet these goals, Fidelity suggests saving at least 15% of your annual salary, including employer contributions. You don’t have to get there overnight. Start by saving enough to get any company match your employer offers and then increase your savings by at least 1% annually until you reach your goal.
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Health savings account, flexible spending account
If available, consider if these tax-advantaged accounts are right for you to help cover out-of-pocket expenses now and in the future. Health savings account (HSA): If you participate in an HSA-eligible health plan, you have access to a powerful tool that can help you pay for qualified medical expenses today and long into the future. An HSA is designed to help you pay for current medical expenses, and, because you keep any balance you don’t use from year to year, it also can help you save for health care costs in retirement. Contributions, Contribution limit
investment gains, and withdrawals for qualified medical expenses all are tax-free.* If you change jobs, you can keep your HSA and continue to contribute as long as you enroll in another HSA-eligible health plan. Flexible spending account (FSA): There are three types of FSAs to consider, all of which allow you to set aside money before taxes. A dependent care FSA helps pay for expenses such as day care or summer camp for qualifying children; a medical FSA can be used for qualified medical expenses; and a limitedpurpose FSA can be used for eligible vision, dental, and preventive care expenses in conjunction with an HSA. Keep in mind that contributions to an FSA may not roll over each year and will not move with you if you change jobs.2 Contribution limit
Dental and vision
Even if your health plan covers emergency dental work or annual vision exams, your employer may offer and subsidize additional coverage that can help you manage expenses. These plans include coverage for routine dental cleanings, basic eyeglasses or contacts, and more. Adding dental and vision coverage may decrease your out-of-pocket spending for these services.
HSA account holders don’t know they keep the unused money in their HSA from year to year. 3
2 . S PE N D OR SAV E?
3. KNOW A LL YO U R OP TION S
Remember, HSAs and FSAs have different rules. HSA: Consider contributing at least enough
you contribute this year. You can save and
Are you worried about covering the cost of
invest it so it can grow tax-free* until you need
a medical emergency, education, or potential
it for qualified medical expenses in the future.
legal bills? Could you use referrals for child or elder care, or advice on how to invest for
to cover medical expenses you expect to incur next year. Contribute the maximum if you can,
FSA: Don’t contribute more than you expect
retirement? Your employer may offer bene-
because you don’t have to spend everything
to spend next year on qualified expenses,
fits to help in these areas and many others. It’s
because in most cases you lose any money
important to consider which of these addi-
you don’t spend. In addition, this is a good
tional offerings can help you where you need
time to submit this year’s bills for reimburse-
ment before the year-end crunch.
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What would happen if you got sick or hurt and couldn’t work? That’s where disability insurance comes in. There are two kinds to consider: • Short-term provides partial income replacement for brief periods of illness or injury, like a surgery or extended medical treatment.
• Long-term provides partial income replacement in the unfortunate event that you are no longer able to work due to illness or injury after an initial period, typically 90 days.
of active 401(k) participants don’t have a beneficiary on file.6
Life insurance serves the primary purpose of allowing your beneficiaries to pay their bills and manage their finances after you’re gone. If you do not have individuals who are dependent on you, then you may not need life insurance. If you do, consider: • Funeral expenses. • Paying off outstanding debt (mortgages, credit cards, student loans, car loans). • Current and future education expenses for children.
• Replacing your income for whatever time period necessary.
4 . FI N A NC I A L W E LLN E S S
• Unpaid taxes.
Getting and keeping your finances on track
Budget: To help maintain a budget for daily
will go a long way to help you protect yourself
living, review our 50/15/5 rule of thumb:
and your loved ones, no matter what you run
• Aim to spend no more than 50% of take-
into along the way. Consider these tips to help
improve your overall financial wellness — now
• Work toward saving a total of 15% for
and in the future.
retirement, including any contribution your
employer may make.
Debt: Most people have some debt, whether it’s student loans, credit cards, car loans, or a mortgage. To help manage it: • Pay more than the minimum payment
required each month if you can.
• Pay off high-interest-rate credit cards first. • Work to stop accumulating additional debt. E mergency Savings: Work to build enough savings to cover 3–6 months of essential expenses. Try to fund this regularly, as you would a monthly bill.
home pay on essential expenses.
Side Trip 5 . B E N E FIC I A RI E S
• Set aside 5% of monthly pay for unex-
Another way to protect your loved ones?
1in 4 20-year-olds will become disabled for a period of time before they retire.5
Make sure you have accurate and up-to-date beneficiaries for your retirement savings plan, HSA, and life insurance. Not listing beneficiaries could prevent them from accessing your benefits and make a difficult time even harder for your loved ones.
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THE PERCENTAGE OF EMPLOYERS OFFERING THESE BENEFITS IN 2017: 4
53% 48% 32% 26% 22% 17%
Educational assistance Individual retirement advice Critical illness Legal assistance Hospital indemnity
Take all of this into consideration, and you can head home confident you’ve made the best choices for your family.
Child care referral
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money. * With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation. The triple tax advantages are only applicable if the money is used to pay for qualified medical expenses. 1. Fidelity has developed a series of salary multipliers in order to provide participants with one measure of how their current retirement savings might be compared to potential income needs in retirement. The salary multiplier suggested is based solely on your current age. In developing the series of salary multipliers corresponding to age, Fidelity assumed age-based asset allocations consistent with the equity glide path of a typical target date retirement fund, a 15% savings rate, a 1.5% constant real wage growth, a retirement age of 67, and a planning age through 93. The replacement annual income target is defined as 45% of pre-retirement annual income and assumes no pension income. This target is based on Consumer Expenditure Survey 2011 (BLS), Statistics of Income 2011 Tax
Stat, IRS 2014 tax brackets, and Social Security Benefit Calculators. Fidelity developed the salary multipliers through multiple market simulations based on historical market data, assuming poor market conditions to support a 90% confidence level of success. These simulations take into account the volatility that a typical target date asset allocation might experience under different market conditions. Volatility of the stocks, bonds, and short-term asset classes is based on the historical annual data from 1926 through the most recent year-end data available from Ibbotson Associates, Inc. Stocks (domestic and foreign) are represented by Ibbotson Associates SBBI S&P 500 Total Return Index, bonds are represented by Ibbotson Associates SBBI U.S. Intermediate Term Government Bonds Total Return Index, and short term are represented by Ibbotson Associates SBBI 30-day U.S. Treasury Bills Total Return Index, respectively. It is not possible to invest directly in an index. All indices include reinvestment of dividends and interest income. All calculations are purely hypothetical and a suggested salary multiplier is not a guarantee of future results; it does not reflect the return of any
particular investment or take into consideration the composition of a participant’s particular account. The salary multiplier is intended only to be one source of information that may help you assess your retirement income needs. Remember, past performance is no guarantee of future results. Performance returns for actual investments will generally be reduced by fees or expenses not reflected in these hypothetical calculations. Returns also will generally be reduced by taxes. 2. Although not required, an employer may opt to allow employees to carry over up to $500 per year in their FSA. 3. December 2016 CARAVAN® Survey of 1,309 respondents enrolled in an HSA-eligible health plan. 4. Society for Human Resource Management, 2017 Employee Benefits: Remaining competitive in a challenging talent marketplace. 5. U.S. Social Security Administration Fact Sheet, Feb. 7, 2013. 6. Fidelity analysis of 22.6 million active plan participants as of 3/31/2018.
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1 in 5
people have a financial plan
50! 15! 5! Hike! Here’s the play: Spend no more than 50% of your take-home pay on essential expenses such as mortgage or rent, health care, utilities, and food; aim to save 15% of your salary for retirement (pretax, including employer contribution); and set aside 5% for unexpected expenses such as car or home repairs. Based on 368,900 responses from Fidelity Investments Financial Wellness Money Checkup from October 2017–June 2018. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917 © 2019 FMR LLC. All rights reserved. 874351.1.0
Articles that help people spend wisely on health costs