When all is said and done, postretirement healthcare costs are likely to be the most significant expenses that clients will incur after retirement. The cost of Medicare Parts B and D continue to rise at a time when the client's income has likely become relatively fixed—and when even the luckiest client's health concerns tend to become much more pressing.
This all means that planning for postretirement healthcare expenses should be a critical concern for each and every client, whether working or in retirement. Fortunately, there are planning vehicles and income minimization techniques—including often-overlooked HSA strategies—that can help stabilize and fund postretirement healthcare expenses with careful planning during the client's working years in order to provide income security during retirement.
The Importance of Income Minimization
While Medicare premium costs will probably continue to rise for all clients over the years, for higher income clients, increasing premium costs—even in the near-term—is a certainty. The cost of Medicare Parts B and D is based upon the client's modified adjusted gross income (MAGI), as it existed two years prior to the coverage year.
These income-based surcharges can be substantial—because of new rules that change the income threshold levels that trigger the surcharges, premium increases can be as much as $7,000 per year for a married couple at the highest income levels.
As a result, income minimization techniques can become critical to ensuring that a client does not enter into a higher income tax bracket so as to trigger the surcharges. For most clients who have retired, this means it is advisable to strategically withdraw funds partially from tax-free sources, such as a Roth account, health savings account (HSA) or tax-preferred financial product. For clients who have yet to retire, the importance of funding these accounts for use down the line is magnified.
Postretirement HSA Strategy
A well-funded HSA can be a powerful tool for mitigating the impact of rising postretirement healthcare expenses. As with a retirement account, earnings on HSA funds grow tax-free—pre-tax contributions reduce the client's taxable income during working years, and distributions for medical expenses are taken tax-free, so that income is not increased in later years.
Importantly, the funds in an HSA do not expire from year to year, so your client can build up a substantial account balance over the years to help cover the cost of postretirement health coverage—or supplement retirement income if the client is lucky enough to escape large medical bills.
