How Medicare Impacts Your Retirement Medical Expenses

Trying to anticipate your medical expenses in retirement isn’t easy. Who’s to say whether you will need a hip or knee replacement next year, or 10 years from now if ever?

Now, you may be thinking that Medicare, the U.S. national health program, will cover the majority of your medical costs once you turn 65, but Medicare hardly covers everything. Indeed, Medicare has lots of moving parts and more than a few wild cards, not to mention deadlines, that if you miss or misunderstand could cost dearly in the form of penalties or denied medical coverage.

Let’s look at a few:

Medicare Has Different Enrollment Periods for Parts A and B

Medicare Initial Enrollment Period

You have a seven-month window to join during this period — from three months before the month you turn 65, through your birth month, and three months after. If you’re already receiving Social Security when you turn 65, you will automatically be enrolled in Original Medicare — Parts A (Hospital) and B (Medical).

Medicare Supplement Open Enrollment Period

Even with Medicare A and B coverage, these plans pay only 80% of your costs. To supplement these costs, you may want to purchase a Medicare Supplement (Medigap) plan during the six-month enrollment period that starts the first day of the month you turn 65. You can’t sign up for a Medicare Supplement unless you’re signed up for Medicare B. If you let this open enrollment period pass, you may lose your right to guaranteed coverage. In other words, an insurer could deny you coverage based on pre-existing medical conditions.

Medicare General Enrollment Period

If you missed the initial enrollment period or weren’t eligible for a special enrollment period (more about this in a moment), then you can sign up during the general enrollment period (Jan. 1-March 31). Nevertheless, penalties could apply if you enroll outside the initial enrollment period.

Medicare Annual Enrollment Period

You can change your coverage annually, Oct. 15 to Dec. 7. This option is similar to employer-sponsored insurance plans that allow employees to change their coverage once a year. Changes become effective Jan. 1. If you’re happy with your Medicare plans, you don’t have to do anything. Your plan should automatically renew Jan. 1.

Medicare Advantage Open Enrollment Period

You can change Medicare Advantage plans annually from Jan. 1 through March 31. You can also elect to switch your Medicare Advantage plan to Original Medicare. Your new coverage begins the first day of the month following the month you make a change. Beware that if you return to Original Medicare, you can also apply for a Medicare Supplement plan, but the insurer could deny your application if it falls outside the six-month Medicare Supplement enrollment window.

Medicare Special Enrollment Period (SEP)

You can enroll in Medicare outside of your initial enrollment period and the general enrollment period when certain events happen in your life. For example, if you are 65 or older and are covered under a group health plan, either from your own or your spouse’s current employment, you may choose to delay your decision to enroll in Medicare Part B without having to wait for the general enrollment period and without having to pay penalties for late enrollment.

The reason it is important to be aware of Medicare’s enrollment deadlines is if you miss one, you could be subject to serious penalties. For example, missing your initial enrollment window to sign up for Medicare Part B will result in a 10% penalty for every 12 months missed. If you waited five years to sign up, thinking you were in great health and could avoid paying your Medicare premiums ($144.60 monthly in 2020), you would pay a 50% penalty ($216.90) for life.

Also note that if you miss a deadline, you could lose your right to Medigap’s (Medicare Supplement), which requires insurance companies to offer certain policies even if you have a pre-existing condition.

How COBRA Impacts Medicare

The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers and their families who lose their health benefits the right to choose to continue group health benefits provided by their group health plan for limited periods under certain circumstances, such as voluntary or involuntary job loss, reduction in hours worked, transition between jobs, death, divorce, and other life events. Qualified individuals may be required to pay the entire premium for coverage up to 102% of the cost to the plan. For the sake of Medicare enrollment, however, COBRA does not qualify as being insured by your employer. So, if you were age 65 or older and on a COBRA plan, you would have eight months to sign up for Medicare Part B.

How Higher Income Impacts Medicare

Medicare uses income testing to determine your Part B premium, which all Medicare enrollees must pay. The standard Part B premium amount in 2020 is $144.60, but there are five brackets depending on your income. For an individual earning $500,000 or more, the top bracket, the 2020 Part B premium is $491.60.

Because of these potential surcharges, you should be mindful in your financial planning of cash flow surges from stock sales, dividends, real estate sales, and other income-generating events that could put you in a higher Medicare Part B bracket.

How Medicare Impacts Health Savings Accounts (HSAs)

Health Savings Accounts (HSA) let you put away funds toward health care expenses if you’re covered by a high-deductible health plan. Neither the money put into an HSA, nor the gains on the money invested, is taxed. As a result, HSAs are great vehicles for helping fund retirement expenses. Once on Medicare, however, you can no longer contribute to an HSA. If you do, you will incur a 10% penalty. Fortunately, if you mistakenly contribute to an HSA, you have until you file your taxes for that year to amend the mistake.

How Medicare Impacts Long-Term Care

Medicare covers medically necessary care for acute care such as doctor visits, drugs, and hospital stays. It also helps pay (with limits) for skilled care such as skilled nursing services, physical therapy, or other types of therapy after hospitalization. In some cases, Medicare also covers ongoing long-term care (LTC) services to prevent further decline for people with medical conditions that may not improve. This can include conditions like stroke, Parkinson’s disease, ALS, multiple sclerosis, Alzheimer’s disease, or renal failure.

But as a rule, Medicare is not designed to pay for long-term medical care in retirement such as help with eating, bathing, toileting, and getting dressed — daily activities often described as custodial care. To help pay for these activities would require an LTC insurance policy.

According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2020 may need approximately $295,000 saved (after tax) to cover health care expenses in retirement. This figure accounts for Medicare premiums, as well as expenses associated with long-term care needs, whether you shoulder them alone or pay for them with the help of a long-term policy.

Again, the $295,000 cited by Fidelity is only an average. The lifetime percentage that someone, who buys an LTC policy at age 60, will actually use their policy before they die is 50%. So, half will use their policy and half won’t.

As you can see, when it comes to retirement planning, one of the biggest wild cards is anticipating your health care needs and how you will cover them. It could be a big number or a small one.

Because of the wide variance, you could take out a reverse mortgage line of credit. The line of credit is one of six payout options offered with a reverse mortgage loan, which allows you to convert some of your home’s equity into tax-free cash to pay for a wide range of expenses, including paying for Medicare or long-term care insurance premiums. You could also use the money to self-insure, meaning you would have the money there for you to cover the just-in-case.

With a reverse mortgage line of credit, you are charged interest only on the portion of the line you use. The amount you don’t use continues to grow year after year, so if you didn’t touch your line for years, it could provide you with even more cash than the amount for which you were initially approved, giving you an even larger medical reserve for your retirement.

To quality, you have to be 62 or older and own and live in the home as your primary residence. You can still qualify if you have a current mortgage, but you must have sufficient equity in the home for the loan to make sense for both you and your lender. To learn more about using a reverse mortgage line of credit as a retirement planning tool, consult your reverse mortgage professional. Find out if a reverse mortgage is right for you.

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Let’s face it. Life is unpredictable, especially when it comes to individual health. But you are not defenseless. You can reduce your health risks by eating and sleeping well and getting plenty of exercise, and you can give yourself more financial peace of mind by knowing Medicare’s enrollment deadlines, what Medicare will and won’t cover, and what coverage makes the most sense for your situation.

You also don’t have to tackle Medicare’s myriad rules and regulations alone. Consult the www.Medicare.gov website for answers. The State Health Insurance Assistance Programs (SHIPs) at https://www.shiptacenter.org/ also provide local, in-depth, and objective insurance counseling and assistance to Medicare-eligible individuals, their families, and caregivers. For further assistance, consider consulting Medicare insurance brokers. They are independent agents who represent multiple carriers. So, they can work to give you unbiased opinions on your Medicare options. They are compensated by the insurance company that actually provides your plan.

We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.

AAG is a reverse mortgage lender. We are not experts in Medicare and this article is not intended to provide health or financial advice. In preparing this article, AAG relied upon the following resources, in addition to those sources listed above. Feel free to visit any of these sites for more information on this topic.

Medicare FAQs

Is Medicare free?

No. Most people age 65 or older are eligible for free Medical hospital insurance (Part A) if they have worked and paid Medicare taxes long enough. Medicare medical insurance (Part B) requires a monthly premium. The standard premium for Medicare Part B in 2020 is $144.60. Coverage provides about 80% of your medical costs. To plug this financial gap, you can purchase supplemental coverage in the form of Medigap or a Medicare Advantage plan.

Do I have to take Medicare if my healthcare is already covered by my employer?

If you work for a company that has 20 or more employees, you have the right to delay enrolling in Medicare. You can enroll at a later date without incurring penalties. If you work for a company that has fewer than 20 employees, your employer decides. If the employer requires you to enroll in Medicare, then Medicare automatically becomes the primary coverage provider, with the employer in the secondary position.

If I’m already receiving Social Security, do I still have to sign up for Medicare?

If you are already collecting some form of Social Security (either retirement benefits or disability benefits) when you become eligible for Medicare, you will be automatically enrolled in both Part A and Part B. If you want Medicare Part D prescription drug coverage, you must actively enroll yourself.