Within the world of financial planning when it comes to retirement there is a plethora of advice. This advice encompasses almost everything under the sun as it includes when to retire, why not too retire, what to invest in as well as what not to invest in and even how to maximize your Social Security benefit.
The problem though, is that with all of this advice there is one simple thing that is left out of every conversation, which is the one thing that you have to have: health coverage and it may cost you more than you think.
Believe or not when you retire, and you are 65 years-old or older as well as no longer receiving creditable health benefits through an employer or spouse’s employer plan you must accept Medicare.
Failure to do so will lead directly to a forfeiture of all current, future and even past Social Security benefits.
The other issue with delaying into Medicare, is that you be subject to late enrollment penalties. These penalties are compounding (they grow the longer you delay) and they are perpetual as they stay with your for the rest of your life once you do enroll.
Thankfully, for most people Medicare is automatic for those that do retire at age 65 years-old, but for those who delay retirement after age 65 years-old there a process that must be followed.
Now, on the surface Medicare is somewhat affordable. In 2018 for those who qualify through employment (anyone who does receive a Social Security benefit) Medicare Part A is premium free, though it comes with a deductible.
Medicare Part B is $134.00 a month. There are other out of pocket costs with Part B, like Part A, and these costs be met with a Supplemental Plan (Medigap Plan).
In 2018, the national average for the most robust Medigap Plan, Plan F, is $208.18 a month. Please note, that residency, age, gender and possibly health conditions (tobacco use) can influence the overall premium of these plans.
The final part of Medicare, Part D, which provides coverage for medications, costs roughly $53.00 a month for a person of average health. This coverage can be less expensive for those who have no need for prescription drugs and can also be quite expensive for those who are using medications.
On average a couple retiring in 2018 should expect to incur, on a national average, just under $9,500.00 in annual costs for their health coverage.
There are two other significant details that need to be addressed too, which are seldom covered by most financial professionals:
The first detail is the fact that Medicare applies a surcharge to any retiree who happens to be earning too much income while receiving Medicare benefits.
Through the Income Related Monthly Adjustment Amount (IRMAA) the Centers of Medicare/Medicaid Services (CMS) will determine how much income you generate in a given year by requesting information from the Internal Revenue Services (IRS). If your income is too high CMS will assess a surcharge on top of your Medicare Part B and Part D premiums that next year.
CMS defines income as your adjusted gross income plus any tax-exempt interest you may have or everything on lines 37 and 8b of the IRS form 1040.
Some examples of income are: Wages, Interest, Capital Gains, all Dividends, Social Security benefits, Pension and Rental Income and any distribution from any tax deferred investment you may have (your traditional 401(k)).
The second detail happens to be what Medicare premiums are inflating at and the news is not good.
The inflation rate for Medicare, historically, is just over 7.5 percent since inception. The Medicare Board of Trustees in its latest report is pegging the rate of inflation through 2019 to 2027 to be over 5.5 percent annually.
For that couple retiring today, if they both live until age 90 they can expect to pay over $520,000 in premiums at the future rate of inflation.
The issue then comes down to if they are earning too much income in retirement. If so, the surcharges for Medicare’s IRMAA start at 40 percent more in premiums and go as high as 280 percent for the highest income earners.
Please note: there will be a new tier to Medicare’s IRMAA starting 2019 due to the Bipartisan Budget Act of 2018
With more and more people heading into retirement the possibility of Medicare premiums impacting their overall standard of living while in their golden years has now become a fact.
The biggest problem that we face, when it comes to retirement, is the fact that not one financial firm within the United States, when it comes to federal regulations, has addressed this issue prudently.
The time to prepare for this coming expense is not the day of retirement or the day of enrollment into Medicare, as the possibility to control these costs in terms of IRMAA is too late, but well before then.
By opting to save for retirement in financial vehicles that do not count as income, Roth Accounts, Life Insurance, Health Saving Accounts (HSA’s) and 401(h) plans a person will be able to control the cost of Medicare while also saving more of their hard-earned Social Security benefit.