The Real Cost of Healthcare for State of Michigan Employees and Other Key Considerations Before Retirement

Healthcare is often one of the largest, and most overlooked, expenses in retirement.

For State of Michigan employees, retiree healthcare benefits can be a tremendous advantage. However, your available benefits, costs, and coverage options depend heavily on when you were hired and which retirement system you fall under. 

B.     DC-Graded Premium Subsidy Plan

Typically applies to employees hired between March 31, 1997 and December 31, 2011 and generally includes:

• Participation in the Defined Contribution (DC) Plan
• The healthcare subsidy is based on years of service. The subsidy begins at 30% with 10 years of service and gradually increases until reaching a maximum subsidy of 80% with 27 or more years of service

 C.      Personal Healthcare Fund (PHF)

Typically applies to employees hired on or after January 1, 2012 (or employees who elected PHF) and generally includes:

• Participation in the Defined Contribution (DC) Plan with an additional employer PHF contribution
• No retiree healthcare coverage from the State
• Instead, the State of Michigan provides additional contributions to the employee’s 401(k) account to help offset future healthcare costs in retirement.

While these healthcare structures may appear similar on the surface, the long-term financial impact can vary significantly depending on your retirement date, years of service, and overall retirement strategy.

At age 65, most State of Michigan retirees transition from employer-sponsored healthcare coverage to Medicare.

For many State of Michigan retirees, this creates a two-phase healthcare planning process:

Before Age 65

• If eligible, retirees often rely on State-sponsored retiree healthcare coverage until Medicare eligibility begins.
• This period is often one of the most expensive healthcare windows in retirement, particularly for employees in the PHF structure.

After Age 65

• Medicare generally becomes your primary healthcare coverage, while the State retiree healthcare plan (if applicable) may function as supplemental coverage.
• However, many retirees are surprised to learn that Medicare still includes:
  • Monthly premiums
  • Deductibles
  • Co-pays
  • Prescription drug costs
  • Potential supplemental coverage expenses

Healthcare planning does not end once you become eligible for Medicare. Instead, the planning process simply changes. As a result, understanding how Medicare coordinates with your State retiree benefits can play an important role in retirement timing, income planning, and long-term healthcare budgeting.

Who This Applies To

• Hired on or after January 1, 2012
• Employees who opted into Personal Healthcare Fund

How It Works

• No retiree healthcare coverage from the State
• Instead, the State provides additional employer contributions intended to help offset future healthcare costs in retirement.

What This Means for You

You are fully responsible for:

• 100% of health insurance before the age of 65 (often the most expensive years)
• Then at age 65, you would qualify for Medicare premiums
  • You pay 100% of Medicare Premiums
  • Plus costs for Supplemental coverage after 65

Across all three healthcare structures, we consistently see several common planning mistakes:

A. Underestimate Pre-65 Costs

For many retirees, healthcare before age 65 can become one of the most expensive periods of retirement, particularly for employees in the PHF structure.

B. Assume Medicare Covers Everything

Many retirees are surprised to learn that Medicare does not cover all healthcare expenses. Costs may still include:

• Medicare premiums
• Deductibles and co-pays
• Supplemental insurance to help fill Medicare coverage gap

C. Not Factor Healthcare Into Retirement Timing

Healthcare alone can be the difference between:

• Retiring at 55 vs. 60
• Or needing to work longer

D. Not Having a Strategy for Long-Term Care

One of the most misunderstood areas of retirement planning is long-term care.

Many State employees assume retiree healthcare or Medicare will fully cover extended care needs. In reality, most retiree healthcare plans and Medicare provide limited coverage for long-term custodial care services.

At GNZ Financial, we believe healthcare planning should be integrated into your overall retirement strategy, rather than treated as an afterthought.

A well-designed retirement plan should help answer questions such as:

• How does your retirement date impact healthcare eligibility and costs?
• What are your estimated healthcare expenses before and after age 65?
• How should healthcare costs be incorporated into your retirement income strategy?
• How does your spouse’s healthcare situation affect retirement timing?
• What risks could healthcare costs create for long-term retirement sustainability?
• How could rising healthcare costs impact long-term retirement sustainability?

For many State of Michigan employees, these decisions can materially impact retirement confidence and financial independence. When healthcare planning is properly incorporated into a broader retirement strategy, it may help navigate uncertainty and create greater confidence as you transition into retirement.

Healthcare is one of the largest and often most misunderstood expenses in retirement.

For State of Michigan employees, retiree healthcare benefits can represent a tremendous financial advantage. However, the value of those benefits depends heavily on understanding your specific plan structure, retirement timing, and long-term strategy.

The key is not simply understanding the system, but understanding how the system fits into your overall financial plan.

Understanding your healthcare structure today may help create greater clarity and confidence for the retirement years ahead.

With thoughtful planning, healthcare costs can become a manageable part of a confident retirement strategy instead of an unexpected financial burden later in retirement.

The State of Michigan retirement system can be complex, especially when coordinating pensions, 401(k)s, healthcare benefits, Social Security, and retirement income planning.

At GNZ Financial, we have extensive experience helping State of Michigan employees navigate these decisions with greater clarity and confidence.

To help support your retirement planning journey, we offer two opportunities to get started:

Whether you are approaching retirement or simply trying to better understand your benefits, proactive planning may help you make more informed decisions and create greater confidence for the future. At GNZ Financial, we are here to help.

(1) https://www.michigan.gov/mdcs/-/media/Project/Websites/mdcs/EBD/rates/Retiree-Rates.pdf?rev=f23d9654a3dc4749b033f1580c7606fc&hash=3BC73DE33C778A2ADB08919D89FAB486

(2) https://www.michigan.gov/orsstatedc/-/media/Project/Websites/orsstatedc/SERS-DC-Forms-and-Publications/R0749G_Retiree_Insurance_Rates_DC_2024.pdf?rev=cd5fc0851790478e97daf2918e24f1da&hash=205542E1A02180B20FB45F9ABCA04305

(3) https://www.michigan.gov/orsstatedc/-/media/Project/Websites/orsstatedc/SERS-DC-Forms-and-Publications/R0749G_Retiree_Insurance_Rates_DC_2024.pdf?rev=cd5fc0851790478e97daf2918e24f1da&hash=205542E1A02180B20FB45F9ABCA04305