Many Americans have seen their health insurance premiums rise with the implementation of Obamacare. They worry that the costs of Medicare will also be a burden when they retire. Healthcare costs for the Baby Boomer population will put a strain on the national debt forcing further increases to Medicare programs and supplemental insurance. The costs of healthcare continue to spiral and contrary to what some believe, Medicare is not free. Here are some guidelines to help you plan for medical costs in retirement.
Medicare has four parts. Part A (hospital insurance) and Part B (health insurance) come standard in every Medicare Plan. Part A, which pays for hospital care, has no premium for people who have at least 30 quarters of coverage under Social Security. For those that have little to no work history, they will incur a monthly fee of $407. Most people don’t pay a Part A premium, because they paid Medicare taxes while working.
However, Part A has deductible amounts as shown below:
For a hospital stay in 2015, you pay:
■ $1,260 deductible per benefit period
■ $0 for the first 60 days of each benefit period
■ $315 per day for days 61–90 of each benefit period
■ $630 per “lifetime reserve day” after day 90 of each benefit period
(up to a maximum of 60 days over your lifetime)
For a stay in a skilled nursing facility in 2015, you pay:
■ $0 for the first 20 days of each benefit period
■ $157.50 per day for days 21–100 of each benefit period
■ All costs for each day after day 100 of the benefit period
Part B coverage applies to doctor and clinic visits and other outpatient procedures.
You pay a Part B premium each month. Most people will pay the standard premium amount. However, this premium is based on your modified adjusted gross income as reported on your IRS tax from 2 years prior. The rates are based on this income and are progressive. If your income exceeds certain thresholds you must pay an additional tax called the income related monthly adjustment amount or IRMAA. This means that if your income jumps in retirement due to pensions, Social Security income, and required minimum distributions from your retirement accounts, you could be paying far more than the standard premium.
The 2015 monthly rates are below and are based on income from 2013:
Part B monthly premiums per person by income and filing status
|File individual tax return with MAGI of||File joint tax return||File married & separate tax return||Monthly Premium|
|$85,000 or less||$170,000 or less||$85,000 or less||$104.90|
|above $85,000 up to $107,000||above $170,000 up to $214,000||Not applicable||$146.90|
|above $107,000 up to $160,000||above $214,000 up to $320,000||Not applicable||$209.80|
|above $160,000 up to $214,000||above $320,000 up to $428,000||above $85,000 and up to $129,000||$272.70|
|above $214,000||above $428,000||above $129,000||$335.70|
Part B also has a $147 deductible and 20% coinsurance.
Note that your monthly premium may be substantially higher due to your future income.
Part C is called Medicare Advantage, and it’s an alternative to a standard Medicare Plan. It still requires that you pay part B premiums and offers additional benefits like prescription drug coverage, eliminating the need for Part D premiums.
Part D also has progressive premiums.
There is a $320 deductible and 25% coinsurance on the next $2,960 of expenses and out of pocket threshold of $4,700.
|File individual tax return||File joint tax return||File married & separate tax return||You pay (in 2015)|
|$85,000 or less||$170,000 or less||$85,000 or less||your plan premium|
|above $85,000 up to $107,000||above $170,000 up to $214,000||not applicable||$12.30 + your plan premium|
|above $107,000 up to $160,000||above $214,000 up to $320,000||not applicable||$31.80 + your plan premium|
|above $160,000 up to $214,000||above $320,000 up to $428,000||above $85,000 up to $129,000||$51.30 + your plan premium|
|above $214,000||above $428,000||above $129,000||$70.80 + your plan premium|
Most people opt for supplemental Medigap or Medicare Advantage plans to cover the copays, deductibles and other charges that are not covered under Parts A and B.
Medicare Advantage tends to be more affordable particularly if you are healthy; monthly premiums are lower than Medicare, but the out-of-pocket expenses may be much higher. The tradeoff is that the network of providers tends to be limited.
Medigap coverage has 10 plans with Plan F being the most comprehensive. This plan is the costliest and will generally be a better option for patients who are sick or have chronic health problems.
Let’s tally up the potential costs of a current couple on Medicare in retirement:
Annual Part B costs: Assume the couple has income over $170K but below $214K due to pensions, SS and or distributions from their 401Ks and IRAs
$293.40 per couple x 12 = $3,521
Part D costs (excess tax paid to Medicare)
$24.60 per couple x 12= $295.20
Cost for Medigap coverage F plan (State of SC): Approximately $130/month
You will be paying almost $7,000 in insurance expenses not including vision, dental and other out of pocket expenses for your prescriptions. To be safe, most financial planners plan on $12,000-$15,000 a year in health expenses to budget conservatively for retirement. This will of course, depend on the client’s health, prescription meds, dental and vision needs and income in retirement. Studies find that it will cost a 65 year old couple roughly $250,000 over retirement to cover medical expenses (this does not include long term care.) If you back-calculate the annual payments based on this present value assuming 30 years of retirement at a 3% discount rate, this would suggest annual costs of roughly $12,800.
Working past 65
Another important note is that many people are choosing to work past 65 and can delay their benefit to save thousands of dollars in annual costs. In order to defer, you must have creditable coverage offered by an employer plan for a business that employs at least 20 people. Note that once you start Social Security benefits you must file with Medicare and at a minimum be on Part A, so delaying your Medicare will likely result in a delay of Social Security as well.
It is essential that if you do delay Medicare past 65, you pay close attention to the potential penalties for delaying part B premiums. A 10 percent penalty is imposed on all future Part B premiums “for each full 12-month period” that people delay enrolling in Part B when eligible to do so (unless they have group health insurance from their own or their spouse’s current employer).