A Retirement Resource for Individuals and Families by Peter Stahl, CFP® Bedrock Business Results
The topic of health care is prevalent in our nation. Pre-retirees increasingly cite the cost of health care as their top financial concern for retirement. These concerns are not misplaced. Research conducted in 2018 shows some couples could need as much as $400,000 for health and medical care expenses alone — up from $317,000 in 2017.1 This could represent more than they have allotted for housing and recreation in retirement. Planning for retirement includes planning for the costs associated with health care coverage. This cannot be done without taking into consideration Medicare costs and coverage.
- 7% Annual inflation rate on Medicare premiums2
- 50% The chance a couple will reach age 933
- 70% The chance of needing long-term care4
- $22 Hourly rate for an in-home health aide4
- 80% Seniors using two prescription drugs per week5
- 50% Seniors using four or more prescription drugs per week5
WHO PROVIDES HEALTH INSURANCE COVERAGE IN RETIREMENT?
Medicare is the federal health insurance program for people who are 65 years old or older. Some individuals will have employer-provided insurance to supplement their Medicare. Whether you have ancillary coverage or not, Medicare will be used for routine health care costs.
How does Medicare coverage work? Explaining how the alphabet soup of Medicare works is not an easy task. I recommend you use several resources to gain perspective, most importantly, www.medicare.gov. However, the purpose of this document is not to dig deeply into the minutiae of Medicare, but to help you become reasonably fluent with the various parts of Medicare in order for you to best prepare for your future.
PART A – HOSPITAL, SKILLED NURSING FACILITY, HOSPICE CARE
Medicare Part A covers hospital costs, a skilled nursing facility for a qualified stay, and hospice care for final stage of life care. If you have Part A and Part B coverage, you should consider purchasing a Medicare supplement plan, referred to as Medigap, to help fill in the gaps in coverage. For example, a Medigap policy covers out-of-pocket expenses such as copayments, coinsurance, deductibles and the 20% of Part B expenses for which you are responsible. Details regarding Medigap are on page 5.
Medicare Part A receives its funding from such sources as payroll taxes and taxes on certain income and investments for higher earners. Most people will not pay a premium for this insurance coverage. The general rule is that this coverage is free if you or your spouse have paid Social Security and Medicare taxes for at least 10 years. If you have to pay for Medicare Part A, premiums will be between $252 and $458 per month.6
PART B – DOCTORS AND OUTPATIENT
Medicare Part B, often referred to as physician coverage, is used for essentially two types of services: medically necessary and preventative care. Medically necessary services are services or supplies that are needed to diagnose or treat your medical condition and that meet accepted standards of medical practice. Preventative services are to prevent illness (like the flu) or detect it at an early stage, when treatment is most likely to work best.
Medicare Part B has a $198 annual deductible in 2020, 20% coinsurance (with no limit), and a monthly premium based on your income. The standard Part B premium amount is $144.60 (or higher depending on your income).6 Most people pay for Part B with a deduction directly from their Social Security benefit. The amount of your 2020 premium is based on your 2018 Modified Adjusted Gross Income (MAGI), which represents your adjusted gross income (AGI) plus any municipal bond interest. This means higher income earners will have a substantially higher Medicare Part B premium. This is referred to as an Income Related Monthly Adjustment Amount (IRMAA). To put it more plainly, it is a tax. The IRMAA tax is an extra charge to your premium. See the Determining Part B premiums chart below.
Determining Part B premiums
In 2020, individuals in the lowest income bracket pay $1,735 per year for Part B coverage. It’s important to note, the premium amounts shown below are for individual coverage. If you’re creating a financial plan as a couple, you should estimate costs for both of you.
|2018 Single MAGI||2018 Joint MAGI||2020 Annual Part B Premium per Individual|
|$87,000 or less||$174,000 or less||$1,735|
|$87,001 – $109,000||$174,001 – $218,000||$2,429|
|$109,001 – $136,000||$218,001-$272,000||$3,470|
|$136,001 – $163,000||$272,001 – $326,000||$4,512|
|$163,001 – $499,999||$326,001 – $749,999||$5,552|
|$500,000 +||$750,000 +||$5,899|
Key points to keep in mind
- Required minimum distributions from qualified accounts (401(k), 403(b), IRAs) can push affluent investors into higher Medicare premium brackets.
- If your income has recently dropped due to certain life-changing events, you may benefit from requesting Medicare to use current income rather than the standard two-year prior look back. Refer to IRS Form SSA-44 for more information.
PART D – PRESCRIPTION DRUG COVERAGE
Medicare Part D is an optional government-sponsored program to help Medicare beneficiaries pay for their prescription drugs. All Medicare Part D plans are provided by private insurance companies. Each Part D plan has its own list of covered drugs (both generic and brand name), called a formulary. All plans must cover certain categories of drugs. Which drugs are covered in each category may differ by plan. Your participation in any Medicare Part D plan should be based on your need for prescriptions and your willingness to use brands that are covered under that particular plan.
In 2020, the average premium for a Part D plan is approximately $30 per month6, but there are other cost considerations. The primary costs of your Part D coverage will include:
- Monthly premiums
- Annual deductible (up to $435 in 2020)
- IRMAA tax
- Coinsurance: a percentage of the cost of the drug
Determining Part D additional premiums
As with Medicare Part B, Part D utilizes IRMAA brackets to determine premiums. For Part B, IRMAA determines premiums. For Part D, IRMAA determines if an additional cost will be added to the premium charged by the policy’s provider. It’s important to note that the amounts shown in the chart below are for individual coverage. If you’re creating a financial plan as a couple, you should estimate costs for both of you.
2018 Single MAGI
|2018 Joint MAGI||2020 Annual Part D Additional Premium per Individual|
|$87,000 or less||$174,000 or less||Your plan premium + $0 per year|
|$87,001 – $109,000||$174,001 – $218,000||Your plan premium + $146 per year|
|$109,001 – $136,000||$218,001 – $272,000|
Your plan premium + $378 per year
|$136,001 – $163,000||$272,001 – $326,000||Your plan premium + $608 per year|
|$163,001 – $499,999||$326,001 – $749,999||Your plan premium + $840 per year|
|$500,000 +||$750,000 +||Your plan premium + $917 per year|
Key points to keep in mind
- Premiums are based on terms and conditions set by private insurance companies and vary by region.
- The national average for an individual’s Part D policy is approximately $360 per year.7
- Your Part D premium may increase, depending on your income (IRMAA tax). Those with higher incomes will pay a higher premium.
- If your income has recently dropped due to certain life-changing events, you may benefit from requesting Medicare to use current income rather than the standard two year look back. Refer to IRS Form SSA-44 for more information.
MEDICARE SUPPLEMENT MEDIGAP
In order to have coverage for many of the gaps within Medicare Parts A and B, it’s common, if not necessary for most, to purchase a Medicare Supplement policy, more commonly known as Medigap insurance. These policies are offered by private insurance companies and can cover a portion of your deductibles and the 20% of outpatient expenses that you are responsible for. Most states offer eight standardized Medigap plans to choose from: A, B, D, G, K, L, M, and N. Massachusetts, Minnesota, and Wisconsin offer their own versions of these plans.
The cost for all Medigap plans varies by state and insurance company. In fact, the cost of health care in your zip code impacts the rate that insurance companies charge for their plans. This results in dramatic differences in price in some states versus others. For your reference, here’s a sampling of two of the most popular Medigap plans in Florida and in Texas, based on a 65-year-old male, non-tobacco user:8
Fort Worth, Texas
- Plan G: $116 – $134/month
- Plan N: $94 – $120/month
- Plan G: $255 – $300/month
- Plan N: $198 – $248/month
Key points to keep in mind
- You must have purchased Medicare Parts A and B in order to purchase a Medigap plan.
- During the “open enrollment period,” you cannot be denied coverage nor charged more for pre-existing conditions.
- Any standardized plan is guaranteed renewable. This means that if you pay your premiums on time, the insurance company cannot cancel your policy.
- Policies are regulated at the state and federal levels.
- It’s worth exploring which plans offer the best value for your needs.
We’ve looked at the premium costs for Original Medicare, Parts A and B, along with Medigap policies and the prescription drug plan (Part D). The bulk of your remaining medical-related costs will consist of items not covered by these plans—such as eyeglasses, routine dental care, and copayments for prescription drugs. The average for out-of-pocket costs is estimated to be $2,385 per year.9
As an alternative to Original Medicare (Parts A and B), some individuals choose a Medicare Advantage Plan (Medicare Part C) instead. These health plans provide your insurance coverage through a regional network of providers. They may be in the form of a Health Maintenance Organization (HMO), Preferred Provider Organization (PPO), Private Feefor-Service Plan, Special Needs Plan, or a Medicare Medical Savings Account Plan. Most offer prescription drug coverage. If not, you’ll want to consider purchasing a separate prescription drug plan (Part D). Medicare Advantage Plans are not part of Original Medicare Parts A and B, but are legally required to offer the same benefits. They are plans offered by private companies that contract with Medicare to provide you with all of your Part A and B benefits. Thus, each plan will have its own set of specific rules. As of 2018, approximately 34% of Medicare enrollees are participating in Advantage Plans.
The basic concept of a Medicare Advantage Plan is to pay less for services in a regional network within which you must receive your care. Therefore, the obvious first step in analyzing the Advantage Plan is to scrutinize the list of care providers to make sure the physicians and facilities you want to use in your region are on the list. Another reason some individuals purchase an Advantage Plan is to obtain limited coverage for items not covered under traditional Medicare, most commonly vision and dental work.
Key points to keep in mind
- You must sign up for Medicare Parts A and B in order to purchase an Advantage Plan.
- You cannot have both a Medigap Plan and an Advantage Plan.
- You cannot have both a Part D plan and an Advantage Plan with prescription drug coverage.
- Given the nature of this plan (a regional network of care providers), these plans will usually work better in a more populated, urban setting because the universe of care providers and facilities will be more extensive.
- Some employers will drop your health insurance if you obtain coverage through an Advantage Plan.
- The Advantage Plan network is usually within one geographical area.
With all the information about retirement and Medicare available at our fingertips, it’s easy to feel overwhelmed. The purpose of this paper is to break down an enormous subject into more digestible amounts, so that you may make wise choices and personalize retirement health care costs. Doing so can help you build a retirement plan that gives you the financial security to look to tomorrow with more confidence. The estimated cost of health care in retirement is dependent on a few variables. However, using the national averages discussed here can be a good guide for establishing a plan to cover some of the costs.
Annual Estimated Cost for Health Care and Medicare
Be mindful of costs as well as inflation as you plan. In the visual below, estimates include a projected 4.2% inflation rate.9 If you’re married or making a financial plan as a couple, you should estimate costs for both of you.
Preparing for your financial future
It’s important to recognize that this paper deals with routine health care costs. Custodial care, also called long term care, is generally not covered by Medicare. It is an equally important topic to address in your financial plan. Helping you recognize the hefty costs involved with your health care in the future is important. Comprehensive financial planning is complex, especially when including the nuances of Medicare costs and taxation. It’s important to diligently prepare during your working years to plan effectively.
Even if you’re in retirement or helping a parent in retirement, working with a financial professional to assess options can help you make the most of your resources.
Brought to you by The Guardian Network © 2020. The Guardian Life Insurance Company of America®, New York, NY
2019-90834 (Exp. 12/21)