By Adam K. Wright, CFA®, CFP®
There is a lot to do to prepare for retirement. A key item on every retiree’s checklist is enrolling in Medicare. Making the switch from an employer-sponsored plan to Medicare adds complexity to retirement planning. Medicare is a verifiable alphabet soup of options. Great, you have options, lots of them, but knowing you’re choosing what is best for you can be elusive. Let’s take a closer look at key parts of the Medicare plans available in order to help you make decisions that are right for you.
ABC’s of Medicare Coverage Options
Medicare is divided into parts: Part A, Part B, Part C, and Part D (there are more options, but we’ll start with the basics). Each retiree or married retired couple must understand and evaluate the different Parts to determine the most relevant and appropriate options for their retirement.
Original Medicare is a package that includes Part A and Part B, with the optional add-on of Part D. Part A covers hospital services. If you or your spouse paid Medicare payroll taxes during your working years for at least 10 years, Part A is free for you. If you didn’t, you can still get coverage by paying a monthly premium. Part B covers doctor visits and other outpatient services. Even if you or your spouse paid Medicare payroll taxes, Part B comes with a monthly premium. Part B costs may also be higher than the base premium, $170.10 per person in 2022, if your income is higher than a certain threshold. For instance, a married filing jointly retired couple that has a MAGI greater than $182,000 gets hit with a Part B surcharge. This is known as IRMAA, and is based on a two-year look-back. Many find the costs of Medicare surprising when planning for their retirements! Part D is an optional add-on that includes drug coverage. Not to make things even more confusing, but Part D has a late-enrollment penalty. Even if you don’t need prescription coverage when you are first eligible for Medicare, enroll in the plan to avoid extra long-term costs. Part D is also subject to IRMAA.
To help with Medicare costs such as copayments, coinsurance, and deductibles, many retirees will purchase Medigap insurance from private insurance companies to supplement their Original Medicare plan. After all, Medicare Part B only covers 80% of care costs with no limits. Having a Medigap policy can help reduce healthcare cost uncertainty in retirements. Some Medigap plans also cover additional services not covered by Part A or Part B but typically exclude services such as dental, vision, and hearing visits. As of 2022, the most comprehensive Medigap option is Plan G for new enrollments.
Medicare Advantage, also known as Part C, is an alternative to Original Medicare that is offered through Medicare-approved private companies. Think of an advantage plan like an employer-sponsored healthcare plan. An advantage plan bundles Part A and Part B and often includes Part D as well. Your choice of providers is often limited to providers that are in-network for the plan you purchase. Medicare Advantage plans also often cover additional services not covered by Part A, Part B, or Part D, including vision, hearing, and dental visits. Medigap policies cannot be combined with the Medicare Advantage plan. If you go with an Advantage plan, you can switch and change plans each year during open enrollment.
When Should I Enroll?
After you’ve decided on the best coverage option for your retirement, the work to enroll in your Medicare plan unfortunately doesn’t get easier. The good news is, if you’re already taking Social Security benefits, you’re automatically enrolled in Parts A and B. Because Part B comes with a monthly premium, you can choose to opt out of this coverage. Otherwise, the premiums will be deducted from your Social Security payments. Consult a fiduciary financial planner for help on determining the best strategy for you when it comes to claiming Medicare and Social Security benefits!
Here’s where it gets complicated. If you’re not taking Social Security but need to enroll in Medicare, you will have to sign yourself up for Parts A and B on your own. You can begin enrolling in Medicare three months before the month you turn 65. This is known as your initial enrollment period. The initial enrollment period ends three months after your birthday month. To ensure coverage starts by the time you turn 65, it’s important to sign up in the first three months of the initial enrollment period.
If you’re 65 or older and still working with employer-sponsored healthcare insurance, you may be able to delay enrolling for Medicare coverage. If this is you, you will need to enroll during the period known as your special enrollment period. However, there are still rules to follow, and if you don’t enroll within 8 months after losing your employer-sponsored health insurance, you could pay significant lifetime penalties when you do eventually enroll. It’s important to note that COBRA does not count as employer-sponsored healthcare. When planning for retirement, know which enrollment period is for you and plan wisely. Mis-timing enrollment in Medicare can cause gaps in coverage or penalties that stay with you for life.
Choosing the Right Medicare Plan for You
You’ve successfully navigated through your coverage options and your enrollment period. There is still more to consider, including (but not limited to):
- Your income level
- Your travel plans
- Your future healthcare needs
Unfortunately, high-income retirees will pay extra for Medicare Parts B and D. As noted previously, in 2022, if your adjusted gross income is above $91,000 as a single filer or $182,000 as a married couple filing jointly, you will have to pay a surcharge on your premiums. Higher healthcare costs are one reason why distribution planning is important during retirement. Managing retirement income and sources can help you save!
Additionally, if you plan to travel in retirement, it’s important to know that Medicare doesn’t offer coverage outside of the U.S. If you were to get sick or suffer an injury abroad, you would have to pay for those medical costs out of pocket unless you have purchased Medigap insurance that offers travel coverage.
Finally, Medicare does not cover long-term care needs. Long-term care can be extraordinarily expensive, so it’s important to build long-term care expenses into your overall retirement plan rather than relying on Medicare coverage to protect you.
You Don’t Have to Navigate Medicare Alone
Medicare is complex, and the coverage options can be overwhelming. Which should you choose? At Wright Associates, we can help you sort through the Medicare puzzle and together we’ll find the right plan for you. Schedule a complimentary phone call to get started.
Adam Wright is a CERTIFIED FINANCIAL PLANNER™ professional at Wright Associates, helping clients plan and prepare their investments to retire on their terms. If you’re serious about planning for your retirement and investing for your future, his annual process will help you make the right money choices today. Therefore, Adam and his team will proactively manage your accounts while communicating the progress of your financial plans. He believes the retirement advice you receive should be intentional and actionable.
Adam has a Bachelor of Science in Supply Chain and Information Systems from The Pennsylvania State University and a Master of Business Administration from University of Pittsburgh, Katz Graduate School of Business. He lives in Upper St. Clair with his wife and two children. When he’s not working, Adam enjoys the outdoors (fly fishing), reading, and taking long runs while listening to a favorite podcast. He’s also currently encouraging himself to take up golf. To learn more about Adam, connect with him on LinkedIn.