Companies are slashing retiree medical benefits. Here's what you can do about it.
(MONEY Magazine) – When Al Rodgers retired in 2001 after 32 years with Lucent Technologies, he didn't worry about how he would pay for medical care. Under the company's retiree-benefits plan, Rodgers thought he could count on subsidized health insurance for himself and his wife, plus dental and drug coverage. But that was then, this is now. Last year, Lucent eliminated his subsidized dental benefits; this year the company dropped subsidized health insurance for dependents for a portion of its former management that included Rodgers. His drug co-payments have also risen sharply. As a result, he is now shelling out almost $350 a month more for less coverage.
To help pay their health-care bills, the couple has cut back on entertainment such as movie nights and restaurant meals. The resulting drop in their expenses, combined with their earnings from part-time jobs at a local weekly newspaper, enables them to just about cover the additional costs. But Rodgers, 61, a former public relations specialist at Lucent's Oklahoma City manufacturing facility, says he feels shortchanged. He notes bitterly: "This is a real financial hardship."
Unfortunately, there are no easy solutions for retirees like Rodgers. But there are strategies you can use to better plan for the medical expenses you'll face when you leave the work force, and to find the coverage you need if you're already retired. Planning ahead is critical. Just over a third of companies with 200 or more workers now offer retirees some form of health benefits, down from 66% in 1988, according to the Kaiser Family Foundation. Meanwhile, employers that still offer retiree health benefits are scaling back across the board and sharply raising premiums and co-payments on the remaining coverage. (For details on these cutbacks, see "Future Shock" on page 50.)
As a result, retirees, already adjusting to life on a lower income, are faced with an increasingly heavy financial burden, especially in the years before they become eligible for Medicare. The Employee Benefits Research Institute (EBRI) projects that, if recent trends continue, a typical retiree who is 65 now and lives to be 90 will need to save nearly $300,000 to pay his premiums (including Medicare) as well as his out-of-pocket medical bills, if he has coverage from a former employer. That same retiree will need to save around $180,000 if he instead relies on Medigap insurance to supplement Medicare. Eric Tashlein, a financial planner in Milford, Conn., says, "Health-care expenses are easily the largest underestimated cost in retirement."
To make sure you don't get caught short, take the following steps now.
SET UP A MEDICAL FUND. If you are still several years away from retirement, you can create your own medical reserve fund by opening a separate savings account that you mentally designate for health-care costs. "If you create an isolated investment fund, similar to a college fund, you're less likely to touch it for other, nonmedical purposes," says Stephen Lovell, a certified financial planner in Walnut Creek, Calif.
A health savings account (HSA) can also be a good way to build a reserve fund for medical expenses, especially if you're in good health. Offered now by a small but growing number of employers, insurers and financial institutions, these accounts, which must be used in conjunction with a high-deductible health insurance plan, are like an IRA for health care, only better. Like an IRA, an HSA allows for tax-free contributions and investment earnings. But unlike with a regular IRA, your withdrawals are tax-free as well, as long as you spend the money on medical care. Depending on your insurance deductible, you can set aside as much as $2,650 in an HSA in 2005, plus an additional $600 if you're 55 or over. You can tap your account at any time, without penalty, to pay most medical bills.
But HSAs are not a silver bullet, especially if you are close to retirement. According to estimates by EBRI, someone who makes the maximum annual contribution starting at age 55 will be able to save only about $44,000 by the time he reaches 65--substantially less than the health-care expenses he'll likely face.
STAY ON THE PAYROLL. Your employer's health coverage is probably more comprehensive and less expensive than any plan you're likely to find in the individual insurance market, says Bonnie Burns, a policy specialist with California Health Advocates, a consumer group. So if the decision about when to retire is in your control, consider scaling back your hours and responsibilities to keep your coverage, rather than quitting altogether. (Typically, you have to work at least 20 hours a week to qualify for benefits.)
LINE UP ALTERNATIVE COVERAGE. If you're thinking of retiring before you're eligible for Medicare, try to get health insurance before you leave. It may not be easy: As an individual, you'll have to go through medical underwriting, and plans can and do reject applicants for health conditions ranging from acne to cancer, says Karen Pollitz, project director for Georgetown University's Health Policy Institute. Premiums vary widely, depending on your health, the deductible you choose and where you live. If you're searching for a suitable policy, you can go to the website of the National Association of Health Underwriters (nahu.org) to find an insurance broker in your area.
If individual insurance isn't an option, you may be able to continue coverage through your employer's health plan (for up to 18 months after you retire) under the federal law known as COBRA. The coverage isn't cheap. Under COBRA, you must pay the entire premium, plus a small administrative fee. Once COBRA coverage ends, though, you'll be automatically eligible for an individual policy under another federal law known as HIPAA, which guarantees access to health insurance for individuals who leave job-based coverage. But you must exhaust your COBRA benefits in order to qualify. Unfortunately, a HIPAA policy, while guaranteed, is not necessarily comprehensive or affordable, says Pollitz.
GO BACK TO WORK. If you're already retired and you don't have health benefits from your former employer, your best bet may be to seek a part-time job that offers coverage. If your retirement was voluntary, your former employer may be willing to put you back on the payroll in a less demanding position. Or you might seek a job that's related to your old one but is less taxing. Or consider a service industry job. IBM retiree Chet Balon, 59, took a four-day-a-week sales job at Barnes & Noble, which qualifies him for the company's health plan at $12 a week. Sure, these jobs may not pay very well, but that's not the point. Says Clark Randall, a certified financial planner in Dallas: "Forget about how much you earn; if you can just get benefits it's worth it."
Recent reductions in retiree health-care benefits are only the tip of the iceberg. You are likely to face even deeper cuts in benefits and steeper premiums in the future.
PERCENTAGE OF EMPLOYERS THAT:
NOTE: Based on responses from private companies with 1,000 or more employees offering retiree health benefits. SOURCE: Kaiser/Hewitt 2004 Survey on Retiree Health Benefits.