Money matters | Dont let health care costs break your bank

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Ira Fateman is a certified financial planner at SAS in San Francisco whose next personal finance classes will be on April 2 and May 14 ( Reach him at [email protected].

“You mean we still have to pay for health care after we retire?” Iris asked when I met with her and her husband, Neil. Nearing retirement, they wanted to plan for their expenses on a reasonable but reduced income. My answer was a straightforward “yes.”

While Medicare pays for a lot, it doesn’t pay for it all. Premiums for Medicare part A (hospital insurance) and part B (medical insurance) are deducted from your Social Security checks.

But Medicare can leave gaps in coverage. That’s why many people purchase Medicare supplemental plans along with Part D coverage (for medications) or Medicare Advantage plans covering pharmacy, co-pays and deductibles (usually).

And there’s more.

“What more could there be?” asked Neil. “Long-term care,” I replied.

Iris and Neil didn’t have long-term care insurance. If they can’t afford to live independently anymore, they’ll have to stay with their children or pay to live in a retirement facility. That can shrink assets rapidly.

Long-term care covers a lot of things. As you get older, you might require being in an assisted-living facility with limited medical supervision and meals prepared for you. Or, if you suffer from a chronic condition, you may require skilled nursing and custodial care either at home or in a facility.  

“How much will that cost?” Neil wanted to know. “And how will we pay for it?”

Start with the average length of time someone needs long-term care. That’s about three years. Costs vary depending on the level of service — skilled nursing being the most expensive. Genworth, the long-term care insurance giant, states that the average annual cost for assisted living in the Bay Area is $54,000. And for skilled nursing in a private room, that figure can double or even triple.

Meeting health care expenses not covered by Medicare will impact anyone’s assets. But it can be done.

For example, some people use health savings accounts, which are savings accounts linked to an eligible high-deductible health insurance plan. Employers now offer this option more frequently. It’s a partial solution for a couple like Iris and Neil contemplating retirement in the next five years, as well as a good option for younger families (their children included). If you don’t spend the cash, it stays in the HSA. And when used for qualifying health expenses, distributions are not taxed. However, you cannot contribute to an HSA when you are on Medicare.  

Another good option is a Roth IRA account. In retirement, income distribution from Roth IRA funds usually is saved for last. That’s because Roth assets grow tax-free forever, aren’t subject to required minimum distributions and can be passed to heirs with no income tax. You can fund your Roth IRA based on current rules, and also convert traditional IRA funds to a Roth IRA at once or over time.

Another way to pay for health care expenses is cash value life insurance — because you can borrow against your policy. However, you should have other very good reasons to purchase a cash value life insurance policy. Why? They’re expensive. Other strategies might be more cost effective and appropriate.

Additionally, the equity in your home can also serve as a safety net for health care costs, including long-term care. You can either sell your home or consider a reverse mortgage that pays you a fixed amount monthly.

For long-term health care expenses, there are additional options, such as purchasing long-term care insurance. Costs vary based on your age and the coverage you select, with the average for a couple running between $2,500 and $5,000 per year. The older you get, the higher your premiums. It should also be noted that these policies have many options and can be complicated.  

Other options to cover the costs of long-term care include hybrid annuity and life insurance products. Some insurance agents specialize in long-term care, which is good, because it takes a specialist to sort things out.

“Complicated,” said Iris. Neil nodded in agreement.

“I agree,” I said. “But you did the smart thing by bringing this matter up now.” Speaking with your financial planner is a good first step. After you see the expenses and all the choices — and their impact on your assets  — then you can weigh your options with a strong measure of confidence. 

Ira Fateman is a certified financial planner at SAS in San Francisco whose next personal finance classes will be on April 2 and May 14 ( Reach him at [email protected].

Ira Fateman

Ira Fateman is a certified financial planner at SAS Financial Advisors in San Francisco. He can be reached at (415) 277-5955 or [email protected].