How entrepreneurs can prepare for healthcare costs in retirement
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Learn why healthcare costs are a hidden risk to entrepreneurs’ retirement wealth, and how to plan ahead for Medicare and long-term care expenses
Entrepreneurs are biologically wired to manage risk. They spend their career building relationships and intimate knowledge of the industries they operate in to create businesses from the ground up.
They operate without the safety net of a traditional corporate HR department and are entirely responsible for creating their own financial future. Yet when planning the sale of a business or optimizing a SEP IRA, one of the most critical liabilities is often completely overlooked: post-career healthcare.
Whether you are calculating the baseline cost for Medicare services or attempting to model your long-term care risks, medical expenses are a compounding threat to the wealth you worked so hard to build.
Because you do not have an employer-subsidized retiree health plan to fall back on, every dollar falls squarely on your portfolio. If you do not develop a sound healthcare strategy now, you risk depleting your assets just to cover basic medical inflation.
Here is a look at some of the healthcare challenges entrepreneurs face as they approach retirement, and the moves you can make today to counter them.
The reality
When estimating business expenses, you rely on hard data. You should approach your retirement healthcare with that same clinical objectivity.
There is all sorts of data about what the average retiree can expect to pay for healthcare during their retirement.
What’s most alarming about these figures is what they exclude. It doesn’t include over-the-counter medications, routine dental work, vision exams, or the potential and catastrophic cost of long-term care. Because of this, the actual amount required to comfortably fund your healthcare is likely even higher than current statistics may lead you to believe.
How to leverage the “triple-tax advantage”
As a business owner, you have likely purchased your own health insurance on the private market for years. If you are not utilizing a High-Deductible Health Plan (HDHP) paired with a Health Savings Account (HSA), you are leaving the most powerful healthcare investment tool on the table.
The HSA offers a “triple-tax advantage” that even a Roth IRA cannot match: your contributions are tax-deductible, the money grows tax-free when invested, and withdrawals for qualified medical expenses are entirely tax-free.
Instead of spending this money on current medical bills, you can pay cash for their current care out of pocket and invest the HSA funds in the market. By letting the money compound over a decade or more, you’ll create a massive, tax-free war chest dedicated exclusively to your retirement healthcare costs.
Navigating IRMAA
While Original Medicare Parts A and B form your foundation, the premiums are not a flat, universal rate.
The federal government imposes an Income-Related Monthly Adjustment Amount (IRMAA) on high earners. As detailed by the Social Security Administration, your IRMAA surcharge is calculated based on your tax returns from two years prior.
For example, if you sell your business, liquidate major commercial real estate, or take a massive distribution at age 63 or 64, that liquidity event will artificially spike your Modified Adjusted Gross Income (MAGI). When you enroll in Medicare at 65, you will be hit with exorbitant surcharges on both your Part B and Part D monthly premiums. Coordinating the exit strategy of your business with your CPA and an independent Medicare expert can help you come up with a workaround to avoid triggering IRMAA.
The custodial care dilemma
Entrepreneurs are accustomed to solving problems with capital, but long-term care requires advanced strategic planning. Standard Medicare strictly covers medical needs, such as a hospital stay or short-term rehabilitation. It does not include “custodial care,” such as the daily, non-medical assistance required for bathing, dressing, eating, or moving around your home.
If you eventually require an assisted living facility or a private in-home health aide, those costs can be staggering and will not be paid by Medicare.
Will you purchase a standalone long-term care insurance policy? Is there a part of your investment portfolio you can dedicate to funding long-term care, if needed? You need to make a proactive decision long before you retire to prevent a financial burden.
A delicate transition
You didn’t build your business by leaving major liabilities up to chance, so your retirement should be no different. Fund that HAS as much as you can, time your business exit right, and remember the more one-off parts of this transition, such as long-term care solutions. Protect the wealth you built on your own terms and take the steps you need to ensure it stays exactly where it belongs.