Chattanooga native Erik Boehm built international and institutional investment expertise by launching his financial career in the Czech Republic in 1989, working for both a local bank and an emerging equity fund. He returned to Chattanooga in 2004 and worked with Merrill Lynch to advise individuals and families, and in 2011, he and a partner co-founded Stone Bridge Asset Management. Erik holds degrees from New York University's Stern School of Business, Johns Hopkins' SAIS, and Georgetown University.
When it comes to planning for retirement, health care costs can throw some uncertainty into the mix, but there are some good ways to anticipate and plan for them, Boehm says.
"It's one of the big unknowns, so that is something that makes it hard, and gives people that sense of 'I can't plan for that,'" Boehm says. "But just realizing that there are elements of health care and retirement that you can start to quantify and plan for is an important thing to know."
This interview has been edited for length and clarity.
Q: What are the major factors people need to consider when it comes to covering health care costs in retirement?
A: No one knows exactly what type of medical services they're going to need in retirement, but one of the first places to start in terms of health expenses in retirement is looking at your health history, and your family health history. How do you live your life? Are you healthy, active, eating well? That's an important thing anyone can do to attempt to reduce their health care costs in retirement is to live a healthy life. Genetics are something no one has any control over, so you can't completely control outcomes, but there are things you can do statistically to help yourself.
Another thing that's important to understand is Medicare is the primary source of health care in retirement, but I think a lot of people believe Medicare is free. There's an element of Medicare that's free, but there are different parts of Medicare. There's a catastrophic insurance element that is free that covers necessary hospital visits, but what if I just want to go visit my doctor or get a screening for cancer or need to take some prescription drugs? Those all require that you pay a premium in addition to the element that's free. Recognizing that is important.
Another thing to realize — and it does get scary — but we've all heard that health care costs have been rising faster than inflation for a long time. The Medicare administration has forecast the rate of increase in Medicare premiums, and it's around 5.7% over the next 5 to 10 years. This is multiple times the normal rate of inflation. It's a bit scary, but we have to think about it, especially since our Social Security checks are not tied to the Medicare inflation rate, but the broader rate of inflation.
Q: How do these variables affect when people should retire?
A: Roughly a third of retirees retire at 62, and that's before you reach full retirement age, and you don't get full Social Security until you reach full retirement age, which for most Boomers today is around 67. So if you're retiring at 62, you're not getting a full Social Security check, and that discount for starting early lasts throughout retirement.
The other element is that you don't have access to Medicare until you turn 65. People who retire really have to have some kind of access to insurance. There is an additional cost to retiring early.
Roughly 30% of those taking Social Security at 62 are doing so because they don't have insurance, and they need to pay for the insurance, so they're kind of shooting themselves in the foot. You have to figure out, how am I going to be insured between age 62 and 65, when at least you become eligible for Medicare?
Q: So how do people typically get coverage before 65?
A: The most popular scenario is my spouse is going to keep on working and I can be covered by my spouse's plan — that's the best solution, and a lot of times that does happen. The less affordable way is to get private health insurance. If you retire from a company and they have COBRA, which allows you to continue that coverage, few companies will help you pay premiums. When you're still an employee, they subsidize your premium. If you stick with COBRA after retirement and you don't have the subsidy, it may be more expensive than going to the private market.
If you're planning on retiring early, you should plan on that gap — either your spouse has a plan you can benefit from, or you should plan on having savings set aside to pay for that 3-year period. We've had clients say 'My job is super stressful, I can't keep this up, but I'm going to keep on working, I'm going to work somewhere less stressful where I can get health care through that 3-year period.' Those are things you need to think about ahead of time.
The more common thing we see is for people to retire and then come to us and say 'Hey, I've retired, I'm looking for an adviser,' and my advice is talk to an adviser before you retire, and do it well ahead of time. There are things you can't control, but one thing you can control is when you quit working, for most people, and you can control within your budget how much am I going to save, you can try to control how much am I going to spend in retirement.
Are there any ballpark estimates people should work from in planning for health care costs? Is there any way to build a roadmap that takes some predictable costs into consideration?
Medicare has projected out certain numbers, so you can get a sense of what Medicare premiums will cost. The premiums are means-tested, so based on income the premium can increase, but the lowest level is going to be around $4,500 per year for premiums for an individual. That covers things like your medical visits and your prescription plan, and you can also buy a Medigap plans that cover additional costs, the deductibles and co-pays you will have. But without adding any bells or whistles or including your deductibles and co-pays, which you'll likely have at some point, you can at least plan for the premiums of about $4,500 a year, and those will increase. If you're at the high end of the income spectrum in retirement, it will be a little more than twice that.
A couple of companies out there try to estimate costs in retirement, and this is going to be more of an average, but Fidelity has a number that projects if a couple is 65 and retiring, then during the course or their lifetime based on annuity tables, they'll spend around $300,000 on health care over the course of retirement. That includes premiums, deductibles and all the expenses. A lot of people want to plan for their kids' college and a certain number of vacations , or want to have money that goes to leaving inheritance for my kids, but if you can afford to plan like that, you should be planning for health care costs, as well.
Q: Are there any resources or tools people should consult or consider in making plans for covering health care in retirement?
A: The best investment tool is a health savings account you build for health care expenses in retirement. The real beauty of an HSA is it's triple-tax-advantaged. When you put money in, you get tax deferral, and you can invest it, so you have tax-free growth in the plan while it's there. When you pull that money out for medical purposes — to cover qualified medical expenses — then you don't pay taxes on the back end, either. The limitation is that you have to be on a high-deductible health plan to use an HSA. If you maximize your contributions to your HSA, which are $3,600 for an individual and $7,200 for a family, when you have an expense not covered you reach into your HSA to pay that expense, you're not taxed on that expense. But if you can afford to pay those costs outside of the HSA, you can let that money grow and invest it and create for yourself a nest egg that's triple-tax-advantaged. And when you get to retirement, you have available funds uniquely qualified for medical expenses. Another advantage of this approach is that money that comes from an HSA is not included in the income used to means-test your Medicare premiums.
Q: Where should people start their planning?
A: The Medicare.gov website is very helpful. Fidelity and T. Rowe Price both have good information online about this. But it's smart to talk to someone who has some knowledge of these different options to make these decisions based on what you know about your family history, and what drugs you may already be taking.