In retirement, you must have health coverage per order of the federal government as it is mandatory which means you will enroll into Medicare.
By federal law, neglecting to enroll into Medicare will lead to a direct loss of any Social Security benefits as well as the possibility of there being late penalties to any premiums too.
Federal law also states that Social Security benefits will automatically pay for most of costs of your Medicare premiums.
The problem is that Medicare premiums are inflating by as much as 7% while Social Security’s cost of living adjustment (COLA) is only inflating at 2.6% at a maximum.
This means that for the foreseeable future the opportunity to rely on Social Security for income is quickly diminishing.
An example of how Medicare premiums impact Social Security benefits is below:
In this example, Person A is:
- 60 years-old.
- Plans on retiring at age 66.
- Earns on average $75,000 per year while employed.
- Enrolls into Medicare Part A, Part B and Part D while also owning a Medigap Plan F policy.
From the graph below we can see that:
- Will earn just over $28,000 in benefits their first year of retirement, which is the blue line.
- This income will inflate by the maximum rate of 2.6 percent which Social Security gives us.
- At retirement the Medicare premiums, the green line, are projected to total just over $6,500.00.
- This cost will inflate at the historic rates that Medicare reports, which is just over 7.5 percent.
The issue is the red line which is Person A’s actual income they receive from Social Security.
Even with Medicare’s Hold Harmless Act preventing a person’s Social Security benefit from decreasing due to increases in Medicare Part B premiums, the other types of coverage within Medicare, a Supplemental Plan coupled with a prescription drug plan (Part D), will still unfortunately decrease this benefit over time.
The time for income planning in retirement has never been more more important, especially when it comes to your health coverage.