Planning for healthcare costs is one of the most important yet overlooked aspects of a long-term financial strategy, especially regarding Medicare and Medicaid. For many, these programs can be critical in managing future medical expenses. However, knowing how to integrate them into your financial plan can make all the difference in avoiding and dealing with catastrophic illnesses and other unexpected healthcare costs.
As an experienced financial planning firm in Birmingham, our team of CFP® professionals can help align your financial and healthcare goals, ensuring you’re covered through all of life’s stages with a strategic approach that protects you and your spouse from the extraordinary increases in healthcare expenses.
In today’s article, we’ll outline key points for incorporating Medicare and Medicaid into your financial plan, with tips on coverage options, long-term care considerations, and strategies to avoid healthcare gaps.
Read our latest Quick Guide: Birmingham Financial Planning Guide for Leaving a Bigger Legacy
1. Understanding Medicare Coverage Options
Medicare provides essential medical coverage for people 65 and older, as well as various options for using and paying for the coverage. It sounds simple enough, but it can get confusing—many options use arcane language to describe them.
Understanding your available choices, from Medicare Part A (hospital insurance) and Part B (medical insurance) to the optional Part D (prescription drugs), Medicare Advantage Plans, and Medigap insurance, is critical. Each plan covers different aspects of care, so aligning your coverage with your expected healthcare needs is essential.
Wealth Management Strategy #1: Annual Medicare Review
With healthcare needs constantly evolving, an annual Medicare review helps ensure that your coverage matches your current and anticipated health profile. For instance, if you require frequent prescriptions, Part D or a Medicare Advantage Plan that includes drug coverage could reduce out-of-pocket costs. BCR Wealth Strategies can help you conduct an annual review to assess your healthcare spending and adjust your Medicare plan accordingly.
Wealth Management Strategy #2: Budget for Potential Coverage Gaps
Even with Medicare, some costs fall outside standard coverage—such as vision, dental, and hearing aids. Consider setting aside a healthcare savings buffer to cover these areas or adding a supplemental plan (Medigap) to cover the gaps. Incorporating these future costs into your wealth management plan helps ensure that your medical needs don’t disrupt your broader financial goals.
2. Considering Medicaid for Long-Term Care
Medicaid is often associated with low-income assistance but also covers long-term care, where Medicare typically falls short. Long-term care expenses can quickly deplete savings, so if you anticipate needing this type of care, it’s wise to explore Medicaid’s role in your strategy. However, Medicaid eligibility requirements can be strict, and wealth thresholds must be managed carefully to qualify.
Wealth Management Strategy #1: Medicaid Spend-Down Strategy
One option, if you think you may need Medicaid for long-term care, is a “spend-down” strategy, where assets are managed and structured to meet Medicaid’s eligibility criteria. This could involve converting countable assets into exempt assets such as a home or other necessary items. BCR Wealth Strategies can help you work through these decisions, balancing Medicaid requirements with the rest of your wealth plan for your retirement years.
Wealth Management Strategy #2: Consider Long-Term Care Insurance Early
If you are over the Medicaid eligibility threshold, consider long-term care insurance, which can alleviate the burden of nursing home or in-home care expenses. The earlier you purchase, the more affordable the premiums. Incorporating long-term care insurance into your wealth management plan protects against unexpected late-in-life costs and keeps your financial goals on track without depleting your estate.
3. Avoiding Gaps in Healthcare Planning
It’s crucial to address the potential gaps that Medicare and Medicaid may not cover. These programs have limitations, and healthcare needs in retirement are unpredictable. Proactively planning for these gaps with savings or other insurance options can prevent costly surprises.
Wealth Management Strategy #1: Establish a Health Savings Account (HSA)
If you are eligible, contributing to an HSA can offer significant tax benefits and allow you to save for future healthcare expenses in retirement. Unlike some savings options, HSA funds are tax-free when used for qualified medical expenses, making it a cost-effective way to cover healthcare expenses not covered by Medicare. Our Birmingham CFP® professionals can help you understand the tax implications of HSA contributions and withdrawals, ensuring your HSA and your long-term financial plan are optimized.
Wealth Management Strategy #2: Bridge the Gap with Short-Term Medical Plans
Short-term health insurance policies can help bridge the coverage gap if you are not yet eligible for Medicare. These plans provide limited but affordable coverage until Medicare kicks in at age 65, helping to avoid high out-of-pocket costs during that transitional period. A Birmingham financial advisor can also help identify other policies that may act as buffers for healthcare expenses, safeguarding your savings for future use.
4. Tax Implications of Healthcare Planning
Medical expenses can create unique tax planning opportunities, and understanding them can benefit your financial picture. Depending on your income and tax situation, Medicare premiums, medical expenses, and long-term care insurance premiums may be deductible.
Wealth Management Strategy #1: Deductible Medical Expenses
Your healthcare expenses may be deductible if they exceed a certain threshold of your adjusted gross income. Knowing what is deductible—from Medicare premiums to long-term care insurance—can significantly lower your tax liability.
In 2024, any medical expenses that exceed 7.5% of your adjusted gross income (AGI) are deductible. For instance, if your AGI is $50,000 and you have $10,000 in qualifying medical expenses, 7.5% of your AGI is $3,750. You can deduct $6,250 in medical expenses as part of your itemized deductions.
Wealth Management Strategy #2: Roth Conversions for Tax-Free Withdrawals
Healthcare expenses often rise in later retirement years, so having a tax-free source of funds can be invaluable. Converting a portion of your traditional IRA to a Roth IRA provides a tax-free pool of assets to access for medical expenses, reducing the need to draw down from your taxable accounts. Advisors at BCR Wealth Strategies can help you determine if Roth conversions make sense based on your income, projected expenses, and overall financial plan.
5. Regularly Updating Your Financial Plan
Your healthcare needs and financial situation will change, so your plan should be flexible. Regular reviews with your financial advisor ensure that your financial and healthcare strategies remain aligned as you age, minimizing the risk of unexpected coverage gaps or financial strain.
Wealth Management Strategy #1: Annual Plan Check-Ups
Annual reviews are essential to keep your financial plan in sync with your healthcare needs. During these reviews, you and your Birmingham financial planner can reassess your Medicare and Medicaid plans, long-term care strategies, and account balances to align your coverage and budget.
Wealth Management Strategy #2: Incorporate Family Planning Conversations
If you are married and/or have dependents, it’s important to consider the broader implications of healthcare planning within your family. Discussing healthcare needs with your family allows you to consider future expenses and their impact on your overall wealth management strategy, making it easier for family members to support your wishes if healthcare needs arise.
Why Partner with BCR Wealth Strategies?
Incorporating Medicare and Medicaid into your long-term financial plan isn’t just about healthcare—it’s about ensuring financial stability throughout your retirement years. By understanding the options and limitations of these programs, you can prepare for routine and unexpected medical needs without derailing your long-term financial security.
Connect with us today to discuss your Medicare/Medicaid planning needs.
