A critical step in calculating how much you need to save to reach an early retirement is preparing a budget. In this post, I’ll take a deeper look at one of the most important things to budget for, which is perhaps one of the most costly parts of retirement: health insurance.
I’ll start by saying that this is really only a problem in the United States. For some reason…or scratch that – for reasons we know – the U.S. does not have comprehensive universal healthcare in the way that, oh, almost every other developed country does. For this post, I won’t get further into this except to the extent that it makes healthcare a significant consideration for retirees, particularly those retiring before they’re eligible for lower-cost health insurance through Medicare.
The importance of good health coverage simply cannot be overstated. Leaving yourself uninsured exposes you to the immediate loss of a significant chunk of your savings in the event you need medical attention. Go ahead and look online about what it would cost out of pocket if you get an infection, break your arm, or end up with a condition like cancer. We’re not talking hundreds of dollars – we’re talking tens, even hundreds of thousands of dollars. That could pretty quickly eat up that money you’ve set aside and invested for retirement.
It’s because of the inflated costs of healthcare in the U.S. that it’s vital to retain health insurance, especially as you start to reach into your 40s and beyond. Or even 30s, for that matter. But healthcare may be one of those things that you never really thought about if you’ve worked for an employer that’s offered healthcare benefits. You do your open enrollment, they deduct premiums from your salary, and you pay a small deductible each time you see a doctor. You probably couldn’t even say off the top of your head how much you pay in medical expenses each year.
Well, let’s say that it’s probably more than you think. And if you don’t have an employer subsidizing your insurance, it’ll shock you how much it can cost. A quick example can demonstrate the reality of paying for health insurance.
Health insurance premiums for employees with healthcare coverage through their employer vary widely between different companies, but it’s not beyond a ballpark figure. Most employers offer two types of plans: regular and high-deductible. Let’s assume that for a regular plan, a single employee (i.e., no family, dependents) pays about $125 per pay period for coverage with a $500 deductible and 20% co-insurance up to an out of pocket maximum of $3,000. The out of pocket maximum is the most the employee will pay for care, including deductibles, co-insurance, and other ancillary costs, but does not include premiums.
This means the employee pays $3,250 per year in premiums alone, assuming 26 pay periods per year (bi-weekly). If the employee sees the doctor with any regularity, they’ll hit the $500 deductible, and if they have any procedure of significance, they might hit the max out of pocket. So the total potential exposure is about $6,250 out of pocket ($3,250 + $3,000).
The equation changes quickly if you have a family, particularly because once you start adding coverage (for people who aren’t employees of the company), the subsidy is reduced. So for a family of four and a regular (not high-deductible) plan, you’re looking at about $300-$350 per month, $1,000 deductible, co-insurance at 20% up to about $5,000-$6,000. Even looking at the low end, that’s $7,800 in premiums, and a max exposure of about $12,800. That’s the low end.
Yeah – take a look at your paycheck. You’re actually paying that much even with subsidized health insurance. Probably more than you thought. And, these numbers are just health coverage – they don’t include dental and vision.
A high deductible plan saves you some money on premiums, but can result in higher potential out of pocket exposure. A high-deductible plan means it’ll take longer before your insurance coverage kicks in because you have to eat the deductible first, and then the out of pocket maximum can be higher. What this means is that if you have a real medical event, whether breaking your leg or having a baby, you can be out of pocket quite a bit.
Unfortunately, wait until you start to research how much it would cost to maintain health coverage without an employer subsidizing it. If you’ve ever left a job, you’ve received a letter informing you about COBRA, which stands for the Cancellation of Benefits Recovery Act. COBRA lets you keep your insurance for up to 18 months after you leave a job, but without the employer subsidizing the premiums. If you’ve ever studied the letter, you’ve probably seen a premium amount that seemed absurd – maybe your $300 per month insurance would have been $1,800 per month if you use the COBRA extension.
Well, here’s the bad news: the amount you would pay for coverage under COBRA is probably about what you’d pay for a private health insurance plan. Seriously, it can be that high for roughly equivalent coverage.
It’s nearly impossible to give a ballpark figure for private health insurance, as there are so many different types and options depending on where you live. Several states have their own health insurance marketplaces and in states without local markets, the federal Affordable Care Act offers health insurance. Both the federal ACA and the state markets may offer different subsidies depending on income level.
And then there are different types of coverage. Some are high-deductible, some are “normal” deductible. There are PPO plans and HMO plans. Everything’s a trade-off. A PPO plan gives you more flexibility to choose your doctors and see specialists, while an HMO will generally be less expensive. When choosing your coverage, like when planning for anything, you have to do your research to determine the right balance of cost versus flexibility.
All this is to say that when budgeting for retirement, health care costs are a significant factor and could be the second-biggest expense after housing. If you’re no longer paying a mortgage, healthcare could very well be your biggest expense. At least as of the time of writing, expect to budget somewhere in the range of $1,000 to $2,500 per month for health insurance premiums depending on the size of your family and the type of coverage. And remember, it’s not only premiums you’ll have to pay – you’ll still have deductibles, co-pays, and co-insurance up to an out of pocket maximum.
As far as advice, there’s not much to give when it comes to saving for healthcare. While you’re working, you may be able to set aside some money in a flex-spending account (FSA), which is essentially a savings account where you can deposit pre-tax dollars that can only be spent on health-related costs. You have to do the math on this one, though. While it seems like an attractive option due to the tax savings, it’s money that you won’t have available to invest. Taking into account compounding returns, you may do better just taking the cash, investing it, and having it on hand for health expenses down the road. I haven’t done the math here, but it’s worth considering.
There’s also an option called a Health Savings Account (HSA), which is similar to an FSA except that you can only open and deposit into an HSA if you have a high-deductible plan. Sometimes you are permitted to invest HSA funds, but you have to figure out if your particular HSA allows you to do this. And make sure you check whether there are fees associated with it – employers run HSAs through financial services companies that may charge you a fee to invest money. It’s not the same as your standard online brokerage that you’d use to invest the money you’re setting aside for FIRE.
Other than that, the only way to plan for health insurance is to invest and have that money on hand when you need it to pay for healthcare premiums.
There is one option that you might also consider: retiring abroad. That’s right, just packing up and heading out to a country that does have universal health coverage. Eligibility for coverage varies significantly depending on where you go, but there are plenty of places where you might either qualify for premium-free healthcare depending on your citizenship, visa, and/or whether you pay taxes when you arrive. Even if you don’t qualify for free or extremely low-cost coverage, you’re likely to find that private insurance is significantly less expensive than the US. Seriously, look it up. And you may not even have to pay deductibles or co-pays. If this is a feasible option or something you’re interested in pursuing, do your research to find out what you might expect when it comes to healthcare.
So that’s the story of one of the most critical expenses for which you need to budget in retirement. Hopefully someday the US will change its tune and join the rest of the world in having affordable, universal access to healthcare. But if everything stays the way it is as of the time of writing, don’t forget to give serious consideration to healthcare costs when planning for your needs in retirement.
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