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Tips for navigating the basics of Medicare in retirement

If you think you only need to save enough money for retirement, think again.

While you’re doing everything you can now to be a healthy retiree, you’re still going to have the expected – and the unexpected – medical costs.

In fact, a 65-year-old couple retiring in 2021 who live to ages 87 and 89 will spend between $156,208 and $1,022,997 in future-value dollars (accounting for inflation) on retirement healthcare expenses, with the average healthy couple spending $662,156. This estimate includes Medicare parts B and D, supplemental coverage and out-of-pocket expenses.1

Another estimate places the average for a healthy couple who retired in 2020 at approximately $351,000 in today's dollars, or $535,000 in future-value dollars.2

Whatever the costs, it’s not going to be an inexpensive undertaking to pay for Medicare, which is your primary health care insurance during your retirement years. Here are some tips on how to include Medicare in your retirement planning.

The ABCs of Medicare

First off, know what Medicare’s different letters mean:

  • Medicare Part A covers hospital visits
  • Medicare Part B covers doctor's visits
  • Medicare Part D is for prescriptions

But wait, what about Part C? Medicare Part C (also known as Medicare Advantage plans) is all-in-one coverage (hospital, doctor, and prescription coverage) that is sold through private insurers that contract with Medicare. A Medicare Advantage plan may also include dental and vision coverage.

When does Medicare become available to me?

You’re automatically enrolled in Medicare Parts A and B at the age of 65 if you’re already claiming Social Security.3 Or you’ll have the option to receive it when you get disability benefits from the Social Security Administration or Railroad Retirement Board.

Perhaps you’re eligible for Medicare Parts A and B, but need supplemental insurance for costs not covered by “original Medicare” (i.e., dental, vision, hearing aids, eye glasses, long-term care, and private-duty nursing).

There is a six month initial open enrollment period for Medigap coverage that starts the month you turn 65.4

How are Medicare premiums paid?

For Part A, no additional premium is paid. For Part B, the premium is paid through a reduction in Social Security benefits. And for Parts C and D, how you pay varies based on the kind of private insurance you have.5

How much will Medicare cost me?

It all depends. Just know that health care costs could be your biggest expense post-retirement. For a preview of what your costs could be, go to Medicare.com, enter your zip code and select a plan. Then, consider your health history (and your family’s), what your future finances will be, and other factors that could affect your money in retirement.

And remember that Medicare doesn’t cover dental, vision, hearing conditions or long-term care. You’ll need a separate insurance plan if you don’t want to pay for these medical expenses out-of-pocket. And, oftentimes, you might still need to pay deductibles and copayments on services covered by Medicare.

Does my retirement income impact how much I pay for Medicare?

Yes. Your modified adjusted gross income (which includes capital gains, Social Security, required minimum distributions from IRAs and 401(k)s, and more) determines the amount you pay for Medicare Part B premiums.

Do I need to save for healthcare expenses when planning for retirement?

Yes, you should do what you can now to help plan for your costs — both for Medicare and out-of-pocket expenses.

In 2020, the average healthy 67-year-old retired couple spent 34% of their Social Security income on healthcare expenses. But according to a model developed by the Society of Acturaries, health care expenses are expected to increase by an average of 5.2% every year6 — meaning they will become a larger and larger portion of retirement spending over time.

Health savings accounts

If you are still working and enrolled in a high-deductible health plan, you may want to consider contributing to a health savings account (HSA). An HSA has a three-part tax advantage — contributions are pretax or tax-deductible, grow tax-free, and can be withdrawn without being taxed when used on qualified medical expenses and premiums.7

Once you enroll in Medicare, you are no longer allowed to contribute to an HSA, but you can continute to use your HSA funds to pay for medical expenses — including Medicare premiums, copays and deductilbes — until they're exhausted.8

Long-term care insurance

Long-term care insurance provides services (such as nursing home care) that Medicare doesn’t cover. To qualify, you likely will need to apply for coverage while in good health. So make it something you consider when planning for your retirement.

Can I do anything now to make paying for Medicare later any easier?

You can also make healthy choices now to increase your chances of aging well and helping to mitigate extra health expenses down the road. It will help you feel better now — especially with all this talk about Medicare costs — and potentially in the long run.

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1. HealthView Services. 2021 Retirement Healthcare Costs Data Report. Published December 2020. Assumes premiums for Medicare parts B and D, supplemental coverage and out-of-pocket expenses. Average figure assumes life expectancies of 87 years (for a man) and 89 (for a woman).

2. Schmidt, Robert, and Eric Walters. "Milliman white paper: Retiree health cost estimates." Milliman. Published May 2020.

3. U.S. Centers for Medicare & Medicaid Services. Getting started with Medicare. Medicare.gov. Accessed January 28, 2021.

4. U.S. Centers for Medicare & Medicaid Services. When can I buy Medigap? Medicare.gov. Accessed January 28, 2021.

5. U.S. Centers for Medicare & Medicaid Services. Your Medicare costs. Medicare.gov. Accessed January 28, 2021.

6. Getzen, Thomas E. "Getzen model of long-run medical cost trends, update for 2020–2029+." Society of Actuaries. Published October 2019.

7. Lake, Rebecca. "How to plan for medical expenses in retirement." Investopedia. Updated January 3, 2021.

8. Behring, S. "Can you have an HSA and Medicare?" Healthline. Published September 23, 2020.

 

This information is a general discussion of the relevant federal tax laws provided to promote ideas that may benefit a taxpayer. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. Taxpayers should seek the advice of their own advisors regarding any tax and legal issues specific to their situation.

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