Optimizing Medicare Benefits: It’s Complicated

As confusing and challenging as choosing the optimal Social Security benefits is, choosing Medicare benefits can make it look easy by comparison. With the average out-of-pocket cost for health care nearing $300,000 in retirement, choosing poorly can do more to threaten your financial security than just about anything else. Understanding your Medicare benefits – how to maximize them while reducing their costs – is critical to planning for health care in retirement. It’s not as easy as checking a few boxes when you turn 65. The planning needs to start well ahead of your eligibility.

The Pieces of the Medicare Puzzle

The Medicare offerings can be confusing, even conflicting, leading to choices that don’t necessarily match a person’s circumstances. The wrong choices can result in inadequate coverage or more expensive coverage. It is essential to understand the ABCs of Medicare and how they fit together to create the right coverage package for you. It’s also important to know that Medicare is not free. The premiums alone (outside of Part A, which is free for most people) can amount to nearly $200,000 over 25 years for a couple, which doesn’t include dental or vision coverage.

Briefly, Medicare offerings consist of four parts:

Part A covers hospital care, skilled nursing, hospice, and minimal home health care. The coverage is free if you or your spouse has at least ten years of Social Security work history.

Part B covers outpatient and preventative care as well as doctor services for an average monthly premium of $170 in 2022. However, the higher up the income ladder you are, the higher your premium, which can run as high as $578 a month in 2022.

Part C combines Parts A, B, and D into an alternative plan called Medicare Advantage (MAP). MAPs are offered competitively and can provide better coverage at less cost – between $0 and $100 a month.

Part D covers prescription drugs, charging an average premium of $37 per month.

(Source: Medicare.gov)

Putting the Pieces of the Puzzle Together

The biggest decision you have to make with Medicare is choosing a plan. Do you choose the original Medicare plan, consisting of Part A and Part B, and then add Part D? Do you add a Medigap plan to cover excluded expenses and out-of-pocket costs not covered by Medicare? Or do you replace your original Medicare plan with a Medicare Advantage Plan (MAP), which includes Parts A, B, and D along with some supplemental coverage?

There is no one-size-fits-all plan with Medicare plans, even for spouses, because they may have different needs. Your choice will come down to several factors, including your health, medical needs, lifestyle, and finances. Original Medicare is more expensive, but it usually provides more flexibility for choosing providers. MAPs are less costly, and it includes coverage not available in original Medicare, including vision, dental, and hearing; but they can be restrictive in terms of choosing a provider. Their coverage can also change frequently, while original Medicare coverage does not.

If you plan to travel a lot in retirement and have extensive medical needs, you will probably want to stay with original Medicare because of the wider availability of providers. You will probably want to use Part D for its broader prescription coverage if you have extensive prescription needs. If you are extremely healthy and younger, a MAP can save you money. If you can afford it, the original Medicare with a Medigap policy offers the greatest access to providers without the need for prior approval from the insurer.

While your needs may change between now and the time you enroll in Medicare, now would be the time to begin researching your options based on your current circumstances and your retirement plan.

Planning Strategies to Control Medicare Costs

While most Medicare beneficiaries will pay a total of $2,040 for Part B premiums in 2022, the premium tab will be significantly higher if your adjusted gross income (AGI) (including tax-exempt income) exceeds $170,000 ($85,000 for single filers). You could be paying as much as $6,528 per person along with a surcharge for a Part D prescription plan.

Many pre-retirees make the mistake of assuming they won’t be earning that much in retirement. But, between a taxable pension and withdrawals from a 401(k) or IRA, it’s easy to reach the higher premium rungs; and that can throw your retirement plan off track. However, several strategies can keep your income below the threshold. One approach is to convert your income sources into tax-free stashes of money. For instance, withdrawals from Roth IRAs, annuities, and health savings accounts (HSAs) are not included in your AGI.

The Better You Plan, the More You Can Save

As federal programs go, Medicare actually does provide pretty good health care coverage for what you’ve paid into the system. According to the Urban Institute, a 65-year-old couple retiring in 2022 can expect to receive more than $400,000 in health care benefits after contributing just $111,000 in Medicare taxes. But it is a government program, which means it’s big, cumbersome, and very complex. So, while you should expect to get your fair share of benefits at the lowest possible cost, you’ll need the benefit of advanced planning, which should start within five years of your enrollment date.