Can You Afford Your Employer's Retiree Medical Insurance?

Last Updated Jun 3, 2010 5:26 PM EDT

Many people hear that their employer offers retiree medical coverage and assume that'll be enough to cover them after retirement. Bad mistake! While employer-sponsored retiree medical insurance can be a godsend for many people who retire before age 65 (the eligibility age for Medicare), often the fine print can tell a different story.

If you hear that your employer sponsors retiree medical insurance, I strongly recommend that you immediately learn all the details of the plan and how they apply to you. Why is this so important? First, most plans have eligibility conditions, such as reaching age 55, 60, or 62, and working for specific periods such as five, 10, or 20 years. So you first have to determine if you meet these conditions. Make sure that your service counts -- part-time work or breaks in your employment can make a critical difference.

Often employers will subsidize a portion of the cost of medical insurance. Again, don't assume you'll be OK -- check out how much subsidy you'll get. Often the subsidy isn't enough to make the insurance affordable. Let's look at a few examples so you can see what I mean.

Suppose your employer pays a subsidy of $200 per month toward the cost of medical insurance. That seems generous, but if the total cost of medical coverage is $800 per month, your share will be $600 per month, or $7,200 per year. You'll need to factor this amount into your planning to see if your retirement income will be enough to cover all your living expenses.

Another common design is to base the subsidy on your years of service. For instance, a plan might provide a subsidy of 2 percent of the cost of the plan multiplied by your years of service. So if you have 25 years of service, the plan subsidizes 50 percent of the cost. If the total cost of insurance is $800 per month, you'll be paying $400 per month, or $4,800 per year.

In this case, you need to investigate whether your employer subsidy is frozen in dollar amounts at the time you retire. Such a feature is common, but it's not always the case. In the previous example, suppose three years after you retire, the total premium rises to $1,000 (not unrealistic in today's era of high cost increases for health care). If the $400 monthly subsidy is frozen at the time of retirement, you'll now be paying $600 per month (that's $1,000 of total cost minus the $400 subsidy). But if the subsidy is allowed to increase in dollar amounts, then the 50 percent subsidy is applied to the new total premium of $1,000. In this case, your subsidy would be $500 per month, and your share would just be $500 per month.

Here's a recent story which illustrates these points. A 62-year-old friend was ready to accept an early retirement buyout offer, until I told him to investigate the retiree medical benefits. It turned out that these benefits would cost him $1,000 per month, which stopped him in his tracks. He's now planning to work until age 65.

If you still want to retire and your employer subsidy doesn't pay for much of the total cost of medical insurance, there's a possibility that you can obtain medical insurance on your own at a lower cost. You can quickly determine whether this strategy could work for you by shopping for health coverage online at such sources as www.eHealthInsurance.com. Note, however, that pre-existing conditions can prevent you from obtaining medical insurance on your own if you're retiring before 2014 -- after that date, health care reform eliminates bans on coverage due to pre-existing conditions.

Even if your employer subsidy is low or even nothing, employers are doing many people a favor by sponsoring medical insurance for their retired employees, since these plans usually don't deny coverage due to pre-existing conditions. If your employer offers retiree medical insurance, I highly recommend you look into it, especially if you have pre-existing conditions and are retiring before 2014, because you might not be able to get medical coverage at any cost except through your employer.

The bottom line: Don't automatically assume that you'll be OK just because your employer sponsors retiree medical insurance. Thoroughly investigate the details of the plan, and do the math on the subsidy and the net cost to you. If you've done your homework and the plan works for you, you've cleared a significant hurdle on the road to retirement.
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    View all articles by Steve Vernon on CBS MoneyWatch»
    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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