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Suze Orman Money Matters

Suze Orman, Money Matters

The Health Scare Lurking in Your Retirement Plan

by Suze Orman

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Posted on Friday, September 5, 2008, 12:00AM

In terms of planning for retirement, there's a dangerous good news/bad news dynamic threatening to undermine your strategy.

The good news is that we're living longer than any previous generation. A 55-year-old man today has an average life expectancy to age 79; a 65-year-old woman today has an average life expectancy to age 83.

Bad Odds for Health Coverage

And now the bad news: Living longer is expensive.

A new study by the Employee Benefits Research Institute (EBRI) estimates that in 2018 a 65-year-old couple that doesn't have any employer-provided retirement health benefits will need more than $300,000 to pay for their out-of-pocket health care costs for the rest of their lives.

I want to be clear: that cost is over and above what Medicare will cover. Actually, that $300,000-plus price tag is the EBRI's estimate of the median expenses for a couple, including drug costs. The EBRI worked up their estimates using a Monte Carlo simulation, and for a couple to have a high probability (90th percentile) of covering their out-of-pocket health care costs pushes the bill above $1 million.

That's asking a lot of any retirement stash. While reform of the health insurance system is getting plenty of attention from both presidential candidates, there is a big difference -- and time lag -- between platform positions and the passage of legislation.

An Interim Health Insurance Plan

Rather than just sit on the sidelines and wait to see how this plays out over the coming year, there's a move you can make today that can protect you now, possibly lower your out-of-pocket costs this year, and give you the opportunity to invest in a tax-deferred savings account for future health costs. Regardless of what reform may be coming down the road, having the ability to save money in a tax-deferred account (it can even be tax-free if you follow certain rules) is never going to lose its value.

What I'm talking about is switching to a High Deductible Health Plan (HDHP) that you then pair with a Health Savings Account (HSA). Given that we're about to head into the "open enrollment" period where employers make you choose your benefit plans for the coming calendar year, it's increasingly likely you may have an HDHP/HSA option in this year's benefit package.

The HDHP/HSA has only been around since 2004, but already more than 6 million Americans are enrolled -- both through employers, and via individual plans as well. It's expected that more employers will be pushing this alternative for the 2009 benefit year.

Offsetting Higher Deductibles

If you're in good health, opting for AN HDHP/HSA can be a cost-effective way to protect yourself and save money.

Let's walk through the mechanics of how this works. First, you need to be willing to take on a higher annual deductible in your basic health insurance plan; for 2009, that means a minimum deductible of $1,150 for an individual and $2,300 for family coverage. In return for taking on the financial responsibility of those high deductibles, your annual premium will be lower.

Of course if you or a family member ends up in need of care, your savings will be offset (or exceeded) by the higher out-of-pocket deductible cost. And the HDHP also will typically have a higher annual maximum out-of-pocket cost than a traditional plan. For 2009, the maximums are $5,800 for an individual and $11,600 for a family.

Tax-Free Health Savings

That's a lot of money to be on the hook for, but the HSA part of the equation will help.

Once you sign up for the HDHP, you then become eligible to set up your own personal Health Savings Account. If the health insurance is offered through an employer you can make pre-tax contributions from your paycheck. If you pay for your own private insurance, you can claim your HSA contributions as a tax deduction. Either way, you've lowered your taxable income for the year.

In 2009, the maximum HAS contribution for an individual will be $3,000. For families it's $5,950. Anyone over 50 years old will be allowed to contribute an additional $1,000. (Some employers may even contribute to your HSA account.)

The money you set aside in an HSA can then be used to pay your out-of-pocket health expenses; you can withdraw the money at any time and with absolutely no tax bill if the money is indeed used to pay for medical costs. But here's where it gets extra interesting: You can also just leave the money untouched and have it grow tax-deferred. Think of it as a Health IRA that allows couples to stash away an extra $5,950 today for their retirement years. And this bears repeating: If you do indeed use the money at any time for a medical expense, there's no tax bill on the withdrawal.

Tax Implications for Non-Medical Withdrawals

But you can also use the money for non-medical expenses, too, though there will be an IRS bill.

Make a withdrawal for a non-medical purpose before you're 65 you'll be hit with a 10 percent penalty as well as having to fork over income tax on the withdrawal amount. But after you turn 65 there's no 10 percent penalty; all you'll owe is income tax -- just like with a traditional IRA.

When you leave a job, voluntarily or not, you retain control of your HSA savings. In fact, if you're laid off and choose to keep paying for your former employer's health coverage through COBRA, you can tap your HSA to cover your premiums.

Make Sure the HSA is Right for You

An HSA account is just another breed of savings account; in most instances the money will be invested in a low-risk bank account, though you may have the option to choose among stock mutual funds, too. Be careful what you choose, though -- if there's any chance you'll need to tap the account to cover medical costs that may crop up over the next few years, that money belongs in a low-risk savings account.

Before you sign up, find out what the going rate is on the account. While the opportunity to invest pre-tax money and have it grow tax-deferred is a great incentive, you want to make sure you're earning a decent rate on your money. If you're shopping for your own private coverage, you have the ability to keep looking for the best offer. Check with your insurance agent or eHealthInsurance.

Next, size up the ongoing nuisance costs that seem to be all too common with HSAs: There's often a one-time setup fee that can be $25 or more, and many plans then levy a monthly service charge that can add up to $50 or more a year. You can also be hit with a service fee of a few dollars every time you tap the account to pay a medical bill. You obviously want to shop around for the lowest fee option. The less you have to pay, the healthier your account will be.

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  • Theresa - Saturday, December 20, 2008, 3:41PM ET  Report Abuse

    • Overall: 4/5

    SUZE always has good information, I enjoy watching her on tv everyweek.

  • Yahoo! Finance User - Friday, October 3, 2008, 10:36AM ET  Report Abuse

    • Overall: 4/5

    I am retired but did take advantage of a HSA accout while working. Personally I think it is good planning.

  • Yahoo! Finance User - Wednesday, September 24, 2008, 1:33PM ET  Report Abuse

    • Overall: 1/5

    More gimmics. Haven't any of these experts learned anything from the current bailout? Nothing is free, these ways to avoid or delay paying for something don't work, they never have. Putting money in a health care savings account is a joke, where does your money actually go? Another Ponzi insurance scheme.

  • Yahoo! Finance User - Monday, September 22, 2008, 10:16AM ET  Report Abuse

    • Overall: 5/5

    Great article with perfect timing! Just this morning, I was looking at the coverage information on my new job, and wondering about questions that you've given me the answers to! Thank you!

  • Bryan - Sunday, September 21, 2008, 9:42PM ET  Report Abuse

    • Overall: 5/5

    This is a sensible strategy. Especially if we're relatively healthy and only need preventative or emergency medical care. It gives me an additional $5,950 in retirement funding - legally! Thanks for the scoop...

  • Yahoo! Finance User - Wednesday, September 17, 2008, 2:19PM ET  Report Abuse

    • Overall: 1/5

    "read the article" link on yahoo brings user to the comments and rating section only. Might be better to actually send user to the article next time. And you wonder why Google is surpassing you??

  • Yahoo! Finance User - Wednesday, September 17, 2008, 12:15AM ET  Report Abuse

    • Overall: 1/5

    Why did Orman leave a link to ehealth? Why does everyone think that is some kind of site with special, secret deals or something? In fact it is nothing but another insurance agency, period. You can get the same info from your agent down the street, and with much better, personalized service. In addition, there are many reputable sites on the net where the insurance agent or broker is a specialist in health savings accounts. One of the best examples is http://www.hsahealthplans.com Shop around. Find an agent with lots of experience in these high deductible health plans.

  • Yahoo! Finance User - Tuesday, September 16, 2008, 6:58PM ET  Report Abuse

    • Overall: 1/5

    Do not worry about health care costs. Health industry will be the next bubble to burst. Like housing, we have created ways to make unaffordable health care affordable. Which in effect creates more demand and drives up the price higher. If you remove the stimulus the bubble bursts. And prices drop to what people can really afford. This will happen within the next 5 years. Obama will inadvertently create the "subprime catalyst" which will burst in maybe 5 years time.

  • jm - Tuesday, September 16, 2008, 6:24PM ET  Report Abuse

    • Overall: 1/5

    The more we have the more the insurance companies will want of our money. Remember when we went to the doctor and even had surgery without it being a financial crisis? Medicine was more affordable, too. Physicians were well paid and had deluxe cars and homes. The American people are going to have to stand up and say stop it. The worst thing is the way they won't let us buy insurance outside of Medicare. We are only allowed to buy the prescription drug plan, the supplemental and Medicare. We should be allowed to buy an insurance that will cover what those three won't cover. Then no one would have to give their life's accumulation of home and money away 5 years before they think they will be ill. It isn't an entitlement society that plans to give their kids their money and home, it is a scared society. They don't want an insurance or greedy drug company to take what they worked for to give to their children. I pay my medical bills and I save for my children. I appreciate my doctor and hospital. And I am not alone. Most of us just want a chance to avoid being taken advantage of in our illness. Profits should be taken off the table when it comes to health care, because of greed. I don't mind anyone making money off me for a service or product, but when they take too much they have to be stopped. We need change plus more stability. We need to straighten out the mess, then keep it stable.

  • Eugene - Monday, September 15, 2008, 4:14PM ET  Report Abuse

    • Overall: 2/5

    People who save their money will get screwed by the government. The means testing will disqualify them.

  • David - Monday, September 15, 2008, 1:12PM ET  Report Abuse

    • Overall: 2/5

    HSA is great if you don't get very sick. It works much better with regular employer contributions. One of the biggest HOLES in this system is in the divorce scenario...my HSA company offered to send my ex-wife a debit card! Huh??!*&

  • binderzz - Monday, September 15, 2008, 2:28AM ET  Report Abuse

    • Overall: 5/5

    At some point it'll no longer make economic sense to live a long life. When that time comes, and we get closer each day, PhD economists will line up to explain the wisdom of "Soylent Green" and its benefits to the economic health of corporate America. Myself, on the other hand, can only respond with "live long and prosper".

  • Yahoo! Finance User - Monday, September 15, 2008, 2:17AM ET  Report Abuse

    • Overall: 2/5

    I think that the article is very good, but there is one problem - insurance companies have tried to subvert the intent of HDHP/HSA's. The HSA makes you personally responsible for saving money for minor health-care emergencies, which is good for people that don't use medical facilities very often. My previous employer wanted to offer them, and I wanted to switch to one, but the best premium price break that our broker could get was around 10%. It did not make sense to have to put aside the high deductible amount in savings if I was only saving 10% on premiums; the break-even point was more around 40% to 50% on premiums. HDHP/HSA's are another good idea that will probably disappear into the insurance quagmire.

  • Flyer1 - Sunday, September 14, 2008, 4:56PM ET  Report Abuse

    • Overall: 2/5

    Maybe you should write an article about what is going to happen to the middle class when they retire and need healthcare. I will tell you because I am watching it unfold. They don't buy the medicine they need and they do not get good healthcare. They become wards of the state after the medical system has taken EVERYTHING they own, including their all of SS benefits. Maybe another answer to the problem is that people should start evaluating the benefits of living in other countries where healthcare costs are more reasonable.

  • Yahoo! Finance User - Saturday, September 13, 2008, 8:30PM ET  Report Abuse

    • Overall: 1/5

    Self-saving for health costs is ridiculous. The investment vehicles yield very little return. The gov is liable to means test eligibility for medicare based on assets they have a clear view of. I think it is a loser. Insurance is the vehicle to cover yourself.

  • goeagles - Saturday, September 13, 2008, 6:26PM ET  Report Abuse

    • Overall: 4/5

    i thought this article was very well written. HSA's are a great idea. I'm 32 and have one. I use it to save money for retirement. I chose one with the option of investing in mutual funds. I work in health care. To all of those that say we get paid too much, you are wrong. I work between 70-80 hours per week. I have been sprayed with blood and deal with HIV patients blood on me all of the time. It is a very risky job which requires a long, expensive education. Most doctors don't earn a decent living until they are about 30. It is the hospital companies and insurance companies that are stealing the money, not us. What's wrong with getting paid well if you work hard? So what if I drive a nice car? I am providing an extremely valuable service to people and get paid well for it. People should spend a week with a surgeon and then make their decision on this. You would not have the same opinion. I am not denying their are some unethical individuals out there practicing medicine. I see it alot (usually oncologists). These people should get kicked out. The problem is it doesn't happen. People need to wake up and realize that if you slash doctors salaries no one will do it. It is already happening We are already looking at a primary care physician shortage of 200,000 doctors by 2020. Cut the salaries and that will get much, much worse. Cut mine and I will do something else. Law sounds nice. People don't realize it but medicare reimburses a doctor about $1200 for a brain surgery. That includes the initial workup, the surgery itself, the hospital stay, and 90 days of followup care. That doesn't even pay for the malpractice insurance and it is why many doctors are considering dropping medicare altogether. With the amount of time involved my car mechanic makes more money than that. The medicare reimbursements have been slashed 300% since 1992 but yet overhead costs have climbed at least that much. You do the math and see why doctors are being squeezed. There is no way to raise more money or raise your prices, like in other industries.

  • Yahoo! Finance User - Friday, September 12, 2008, 3:58PM ET  Report Abuse

    • Overall: 1/5

    It's hideous. Most people can't even save $300,000 in their entire IRA account, let alone saving it for medical needs. At least gas is somewhat control by supply and demand. I wouldn't use HSA as a savings vehicle. Inflation alone will eat up the meager interest you earn as a money market account. And it's too short of a time period to invest in mutual funds.

  • cowboy47201 - Friday, September 12, 2008, 1:25PM ET  Report Abuse

    • Overall: 2/5

    A good explanation of HSA's but isn't all these plans just a way to make a broken system last longer when we need to overhaul the whole thing. Someone commented that most of the $$ is in the last year or so of life, which I have read also. so maybe we need to look at death differently. I remember a family member a few years ago who developed stomach cancer at 88. The docs wanted extensive chemo and other therapy that would have left him with no quality of life, but barely alive. When a family member said no (after consulting the patient) the doc looked at him and made a comment to the effect that he must not love his father very much! Outrageous. The treatment would have been in the 100K range and for what, a few months in ICU. Docs need to grow up and face that life ends and that does not mean a big payday for them.

  • Yahoo! Finance User - Thursday, September 11, 2008, 2:38AM ET  Report Abuse

    • Overall: 1/5

    HSA or whatever - how can you possibly plan for something that has no limit by definition?!? No matter how much (within reasonably achievable range) you save, so-called "healthcare professionals" will suck you dry within minutes. Literally. It may take awhile for fellow Americans to wise up and realize that this massive armed robbery cannot go on forever. Needless to say, every day of this process takes thousands of lives... In the meantime, sign everything over to kids, and screw them!

  • Yahoo! Finance User - Wednesday, September 10, 2008, 9:20PM ET  Report Abuse

    • Overall: 3/5

    Let's face it, after paying for gas and food, how many couples will have anything to spend of health care? Something's is seriously wrong with the health care system in America, and all the planning in the world won't help most couples. What's wrong with the American system? Overpriced doctors, for one. Just take a look at the doctor's parking lot of your local hospital some day. Porsches, BMWs, Maseratis, Mercedes. Our legislators should be required to take a trip over to Asia sometime to see how they do it over there, where the typical emergency room visit costs $6. Of course, that might mean a few less fancy cars....

  • J - Wednesday, September 10, 2008, 8:07PM ET  Report Abuse

    • Overall: 1/5

    Oh, please this women must get kick backs from the insurance companies or else she can't find anything useful to write about. My older relatives all chose Humana in Florida. They never had to pay extravagant fees. My feelings on this subject...Save all that money just to hand it over to Doctors and hospitals? I would rather die!

  • Yahoo! Finance User - Wednesday, September 10, 2008, 12:29PM ET  Report Abuse

    • Overall: 1/5

    An HSA only helps if you start at a young age, and the fact that the cost inflation of health care far outstrips the consumer price index makes even that questionable. The only thing that is going to work would be if the US decides that "socialized" (don't be afraid;we have already socialized the mortgage business)medicine is the proper approach. Instead, e.g., of making fun of the French perhaps we should try and learn something from a group of people that get much better medical care on average than we do.

  • Yahoo! Finance User - Wednesday, September 10, 2008, 11:06AM ET  Report Abuse

    • Overall: 4/5

    Suze is a GMILF~!

  • RobertM - Wednesday, September 10, 2008, 6:59AM ET  Report Abuse

    • Overall: 4/5

    Suze is correct in that the HSA/HDHP is the direction we should all (society) be going to, but it must be combined with true competition in the medical field. It makes no economic sense to pay for an check-up or routine visit through an insurance company with its associated overhead/mark-up. If doctors were required to post their fees, people would have the option to shop around a choose the doctor who offers the best deal in terms of coverage and service, and the doctors would benefot by being paid immediately through the HSA with reduce paperwork. I would love to be able to look on line or in the paper and see a "back-to-school sale on check-ups, we will do these tests/shots for $$$ and guarantee a no more than 15 minute wait." As for retirement medical costs, Suze did not note that most of the medical expenses occur near death (final catastrophic illness) so it is not as though one needs that pile of cash throughout ones retirement. Frankly, once your gone the bills become someone elses problem (hence the great importance of effective estate planning). I know from person experiences that the end of life medical expenses are outrageous and a gross rip off. For example, $100K medical expenses to treat an elderly patient who was destined to die shortly. It is foolish to save money just to hand it all over to the greedy medical/pharmaceutical complex when you die.

  • Erin - Tuesday, September 9, 2008, 7:47PM ET  Report Abuse

    • Overall: 4/5

    The article and the comments that follow should be read to understand that we are all coming up on a less than "delightful" situation. No one including the government is going to pay for everything. Everyone needs to assume personal responsibility and take action. There is no baby boomer generation to pay for the older minority now that the boomers are the majority. Everyone needs to take care of themselves to the best of their ability and needs to save somehow rather than rewarding themselves with foolish gifts that they cannot afford after retirement. You can choose to believe the campaign rhetoric designed to buy your votes but it is simple economics......so much money available, so many that want it and therefore everyone gives up something and spends their own money to take care of themselves.

  • Yahoo! Finance User - Tuesday, September 9, 2008, 5:40PM ET  Report Abuse

    • Overall: 5/5

    Very good article. Remember, this is generic advice, not tailored for everyone reading it. If it sounds good then do your homework, if not, then disregard it. No need for the mean-spirited comments. We have a HDHP and HSA account though we are no where near retirement. We are both self employed, healthy, and we have never met our deductable before so it seemed like a good decision for us. We have two kids that are school age and we also bought accident insurance through the school at a very low price. That plan covers 24/7 for accidents that the HDHP doesn't cover hense saving our deductable when little Billy breaks his arm riding his bike. And with both it's still a lot less than our old HMO cost us. But definately, everyone must research if it's right for them.

  • Mark - Tuesday, September 9, 2008, 4:42PM ET  Report Abuse

    • Overall: 2/5

    The example of investing $3000 a year over a 45 yr period & only ending with $250k used a 2.5% growth rate, of course it doesn't sound good!! Put a more reasonable IRR and you get $556k (5%), & $1.42m (8%). These are not unmakeable 45 yr IRRs. The bottom line the reason HSAs make sense is that healthy folks can not only save money for deductables (Which currently goes to HMO profits), but also it could create a powerful health care consumer environment. For instance, Americans are very astute consumers and thats one of the reasons why we pay less for most items than equivalent products in other industrialized countries...but with Healthcare our model removes the individual consumer power...we allow other folks to decide how much other people pay for healthcare(HMO & single payer plans). No incentive to demand lower prices. HSAs put power back to the consumer, and therefore will act reduce costs.

  • Yahoo! Finance User - Tuesday, September 9, 2008, 4:00PM ET  Report Abuse

    • Overall: 5/5

    This is a fine article which helps explain HSA's. Personally, I have one without an employer match and pay over $24,000/ year with pre tax dollars which does not include the high deductible. It's a good plan but very expensive. Seems as if the estimates of those who can actually retire being about 5% may eventually become true considering the price of health insurance. Despite the high cost of health insurance now, it's still kept lower than it would be due to the existence of medicare which pays for the highest costs of medical care which occurs at the end of life. Without medicare, our insurance premiums would be astronomical. Those who promote self reliance, which I condone, may not have considered how our current entitlement program of medicare, mainly for seniors and the disabled, effect the rest of us who pay for private healthcare insurance. And despite the condemnation of what some are calling socialized medicine if it is brought to you by the government, private insurance companies offer the equivalent of corporate socialism. The difference in private insurance and medicare is that private insurance is for profit and medicare is not. They will both limit what care you will get.

  • Yahoo! Finance User - Tuesday, September 9, 2008, 2:23PM ET  Report Abuse

    • Overall: 2/5

    So, it's cut and dried - everyone should have an HSA with a High Deductible Health Plan?? Setup fees, monthly service charges, and poor investment choices - I don't see how this is a superior retirement investment, especially in conjunction with a high-deductible insurance plan that leaves many reasonably-healthy Americans tapped out at year-end from routine care, prescriptions, birth control, etc. It strikes me as highly unlikely that the HSA will grow, untouched, for life - COBRA health insurance will often wipe out years' worth of HSA contributions; fees and charges erase more, and inflation will whittle any remainder down faster than you can say "low risk equals lower-than-inflation-rate returns". Sure, it's really smart for a young person to set aside some money for private health insurance, just in case. But in the best-case scanario, the annual $3,000 per person limit - invested conservatively, EVERY year, from age 20 to age 65, without using any of it for pre-retirement health expenses - would grow to less than a quarter million dollars. Which, according to the article, isn't even enough to cover the median retiree health cost-share. Shame on you, Suze. If you're going to give advice, as in telling people what to do, then you need to take responsibility for giving GOOD advice. Run the numbers through a compound interest calculator before running off to your computer to tell people "Do this, it's a great way to save for the future," or at least add the reality check: "as long as you don't ever actually get sick or need COBRA coverage or experience inflation or get charged any of the numerous garbage feees charged on these accounts."

  • Curious - Tuesday, September 9, 2008, 2:13PM ET  Report Abuse

    • Overall: 3/5

    seekit233612 says: ...insurance, employers, and government abandoning their social responsibilities to us.

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