Nearly 4 million people turn 65 every year here in America and many of them are looking forward to retiring soon. There's a lot of financial planning that goes into retirement, such as when to apply for Social Security benefits and when to begin distributions from retirement accounts.
It's also important to plan for your Medicare costs in retirement. Healthcare costs can be significant as we age, but we are often ill-prepared to plan for them because we've never been insured under a national health insurance program before.
Medicare has two kinds of costs associated with it. There are costs for the Medicare coverage itself. Then there are additional costs that you share with Medicare for medical services you receive. Let's look at the costs that should factor into your decision about when to retire:
Costs for Medicare Itself
Original Medicare has two parts: Part A Hospital Coverage and Part B Outpatient Coverage.
Part A, for most people, is already paid for. During your working years, your paychecks are taxed to pre-pay for your hospital insurance. If you or a spouse worked for 40 quarters in the U.S, you will pay nothing for Part A. (People with fewer quarters can buy in).
Parts B and D, however, have monthly premiums. In 2018, the base premium for new Part B enrollees is $134 per month. However, some Medicare beneficiaries are subject to an Income-Related Monthly Adjustment Amount (IRMAA), an additional premium that high-income earners must pay. The first tier of higher premiums begins with individuals who earned $85,000 (or $170,000 for married couples). Depending on how much you earn above this, your Part B can cost anywhere from $187.50 per month to $428.60 per month. As you can see, miscalculating this can be significant if you are in a higher bracket than you anticipated, so it's important to estimate your expenses ahead of time.
One tricky part is that your IRMAA is based on your tax returns. Since there is a delay in getting this information from the IRS over to Social Security, your premiums are generally based on your modified, adjusted gross income reported on your tax returns from two years prior. Since many enroll in Medicare right after retirement, your income two years ago may have been significantly higher than it is now. If this occurs, you can request that Social Security reconsider your premiums, but you must present proof that your income now is lower.
Finally, there are Medicare Part D premiums, which are set by the insurance companies offering these plans. Across the nation, Part D drug plan base premiums range from around $20 per month to well over $150 per month. Like Part B, though, Part D premiums can also have an IRMAA added on.
Plan ahead by reviewing the income charts and determining where you might fall in the future.
Covering your Medicare Cost-Sharing
Another surprise that people often find is that Medicare doesn't pay 100% of your medical costs. There are deductibles, copays and coinsurance that you share in on the back end when you receive medical services. For example, Part B only covers 80% of your outpatient medical expenses. You are responsible for the other 20%.
When planning for costs in retirement, you therefore need to be aware that just as you have had deductibles and copays on your health coverage under age 65, you will also share in similar costs on the back end of your Medicare coverage in retirement.
Fortunately, there is optional additional coverage that you can purchase to help fill in some of these gaps. Medicare Supplements and Medicare Advantage plans are examples, and such plans help to make your back-end spending much more predictable.
As you approach age 65, consider speaking with a Medicare insurance broker who can help you estimate your future healthcare spending.
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