Getting Medicare Right

By Sally Hanley-Whitworth, CFP® | Executive Vice President, Wealth Services | 03.15.2019

Americans approaching their golden years have a vast range of perceptions about how expensive their medical costs will be. Some seniors believe healthcare will be free thanks to Medicare, while others expect it to become increasingly burdensome. Regretfully, the truth is closer to the second view.

Affluent retirees need to prepare for substantially higher medical outlays than their peers. Barron’s found that a typical high-income 65-year-old couple could encounter healthcare expenses north of $550,000 in retirement, more than twice the average. Some of those increased costs are attributable to good news: Wealthy retirees tend to live longer and use more healthcare, according to the National Bureau of Economic Research.

But high-income seniors are also required to pay surcharges for Medicare that can drastically increase their premiums—that’s right, Medicare is not free. High-income surcharges are one of several potentially costly aspects of the country’s 65-and-above health insurance program that often go unnoticed right up until registration. Medicare’s labyrinthine rules and design create real risks of under-utilizing its benefits while increasing its costs, and these risks are higher for affluent retirees.

Before we dig into the surcharges—officially called an Income-Related Monthly Adjustment Amount—it’s important to develop a bit of top-level familiarity with how Medicare works.

Recite Your ABCs | Medicare has several “parts” for each segment of health insurance coverage:

  • Part A: According to the official Medicare website, “Part A covers inpatient hospital stays, care in a skilled nursing facility, hospice care, and some home healthcare.” There is no ongoing premium payment associated with Part A, although there is an annual deductible.
  • Part B: AARP describes Part B as helping “pay for doctor visits and other medical services, including screenings for heart disease, diabetes and some types of cancer.” There’s a monthly premium, which is subject to high-income surcharges, and a small annual deductible.
  • Part C: This is commonly called Medicare Advantage these days. Part C plans are provided by private insurance companies in accordance with Medicare guidelines and are intended as an alternative to Parts A and B (and often Part D). It’s private insurance, so there will trade offs from plan-to-plan, as well as premiums and deductibles. But these plans also provide seniors with flexibility to choose the options that are important to them.
  • Part D: Prescription drug coverage is offered by private insurance companies either on a standalone basis or bundled into Medicare Advantage plans. Part D is also subject to high-income surcharges.
  • Plan F: This is the most comprehensive supplemental offering from a group of private insurance options (often called Medigap) that are intended to cover benefits not offered by Parts A and B.

Save the Date | We’ve established that seniors qualify for Medicare when they reach 65. But they still need to enroll in many cases. Those that have begun taking Social Security benefits prior to the age of Medicare eligibility will be automatically enrolled in Parts A and B, but those that delay need to adhere to the initial enrollment period. This begins three months before the month you turn 65, includes your birthday month, and ends three months after that month.

Seniors that miss this window will be required to pay a late enrollment penalty for the entire time they elect Part B. Those that have retained private or employer-sponsored coverage may still need to enroll or else they could risk paying a penalty upon electing Part B for retaining insufficient health coverage. Exceptions to this may apply if the employer has 20 or more employees and you or your spouse are actively employed.

Working backward from the enrollment window, and then adding time to weigh the long list of variations and technicalities, means that seniors would be smart to begin seriously considering their options shortly after their 64th birthday.

High Income Equals Higher Premiums | Getting back to those surcharges, they’re based on “the adjusted gross income you reported plus other forms of tax-exempt income,” according to Medicare Interactive. Individuals with annual income above $85,000 and couples over $170,000 will be subject to monthly premium increases, and there are four income brackets with progressively larger surcharges.

As with all wealth planning, advanced consideration can help manage the implications of these higher costs. Everything from taking larger retirement-account withdrawals in early retirement to making charitable contributions in your later years can help minimize, or even eliminate, high-income surcharges. The most important step is the first one, which is to begin developing a plan far before you need one.

If you still have questions or concerns regarding this topic, reach out to our retirement plan team experts—we would be happy to help.

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