While the rising cost of health care is a big issue for those currently employed, the issue is also problematic for retirees and those approaching retirement, especially when coupled with the fact that many retiree health plans seem to be going by the wayside. This article from the Los Angeles Times via the Philadelphia Inquirer highlights one idea for providing for health care during retirement which appears to be taking on at colleges and universities: “Health-care idea for earlier retirement.” Excerpt:
The latest invention to come out of American universities has nothing to do with science or technology. Instead, it’s a new kind of health insurance.Worried that many employees were delaying retirement simply to keep their medical coverage, a group of colleges and universities has created a plan that lets workers and employers contribute to a fund that can be tapped after retirement for medical expenses and for insurance to supplement Medicare.
You can read more about the program here and here, and also in this No Action Letter from the SEC which describes in detail the legal structure of the program:
Each College will establish two VEBAs, one to receive and hold contributions made to the Plan by the College, and the other to receive and hold contributions made by individual participants. . . The College will make contributions to an employer-contribution VEBA to fund its portion of the College’s Plan. Participating employees and former employees of each College may make voluntary after-tax contributions to an employee-contribution VEBA trust . . . Each VEBA will maintain a separate account for the assets of each participant. Employee and employer contributions will not pass through the Consortium. Rather, contributions will be under the control of the trustee, which will be unaffiliated with the Consortium or any of the Consortium’s employees. . .Following the participant’s retirement, the balances in the individual accounts held for each participant in a College’s Plan will be available to pay for health-insurance premiums and other qualifying medical expenses. A portion of each benefit payment (i.e., premium payments or reimbursement of qualifying medical expenses) will be drawn from each of the participant’s VEBA accounts on a pro-rata basis based on total assets in each of the accounts . . . [A]ny funds in an individual participant’s account in each VEBA not used for medical benefits will be forfeited.
According to the Emeriti website, Fidelity Investments in a 2005 release estimates that a couple retiring in 2005 at age 65 would require $190,000 in savings to cover medical costs over the next 15 to 20 years. The estimate apparently included the Medicare premium, expenses associated with Medicare cost-sharing provisions, and the cost of services not covered by Medicare, but did not include the cost of long-term care except on a very limited basis. (You can actually estimate your health care expenses during retirement by using this handy Retirement Health Care Cost Calculator here.)
There is a related article on the same topic from the Journal of Financial Planning: “Health Care Costs a Nightmare for Retirement Dreams.” The article discusses how health savings accounts are thought to be a good vehicle for paying for health care expenses during retirement. The small percentage of individuals who might be able to afford it could pay for their current medical expenses out of their own pockets without tapping the money in their health savings accounts, thus allowing the money in their health savings accounts to accumulate for future health care expenses to be incurred during retirement.