When planning for retirement, people often concentrate on saving via IRAs, 401(k)s or other retirement accounts. If they’re really on top of things, they’ll make moves to strategize their retirement taxation. But one critical aspect of retirement planning that’s overlooked far too often is health care.
As most retirees get older, their medical needs increase, and staying healthy generally gets more expensive. Fortunately, Medicare helps defray those expenses, making a healthy retirement much more attainable. However, failing to plan your Medicare strategy can cost you needless expense, sometimes for the remainder of your life. Choosing the wrong Medicare options can make it more difficult to get needed medical treatment or make that treatment more expensive than necessary.
There are key aspects of Medicare that you should plan for before you retire. We’ll go over the highlights here, but it’s important to consult with a Medicare expert before finalizing your plans.
Health Insurance Costs May Rise in Retirement
Retiring early is a dream for many, but one thing you must consider if you want to retire before the traditional age of 65 is that you still have to wait until your 65th birthday to be eligible for Medicare. If you retire early, you will need to plan for medical coverage to fill the gap between your employer-sponsored plan and Medicare.
Because most people are covered by their workplace health benefits, they drastically underestimate the expense of health insurance in retirement. Once they have to bear the full brunt of funding a health insurance plan, they’re astonished at how much it costs. It’s important to get a good idea of how much you will need to spend on health insurance before Medicare kicks in, or you might risk financial hardship in those insurance gap years.
Missing Deadlines Can Cost You
Another important aspect of timing comes when you’re married. Spouses of different ages sometimes stagger their retirement, with one spouse continuing to work while the other takes a permanent vacation. This can create issues! Not only is the still-working spouse prone to feelings of jealousy, but the retired spouse risks making a decision that will result in long-term unnecessary expenses.
You have a seven-month window surrounding your 65th birthday to file for Medicare under the Initial Enrollment Period (IEP). If you don’t file between three months before and three months after you turn 65, you miss out on that IEP. This means you must usually wait until the Medicare General Enrollment Period, which only happens between January 1st and March 31st each year.
One of the most common reasons people miss IEP is because their spouse is working and has employer-sponsored insurance that covers both partners. If you miss the Initial Enrollment Period, you may be penalized with Medicare premiums that are permanently higher than if you filed on time.
Mortgages Can Impact Insurance Costs
Couples who retire early at the same time also face potential pitfalls. Believe it or not, a significant one involves home mortgages! As noted above, you’ll need health insurance to cover the time between the end of your employment and your Medicare eligibility. The Affordable Care Act (ACA) provides tax credits to lower your monthly insurance premium when you enroll in a plan via the Health Insurance Marketplace.
However, that tax credit is income-based. If you earn too much money in a tax year, it can impact your eligibility for ACA tax credits. That’s where your mortgage comes in. If you choose not to pay off your mortgage before retiring, you will need to service that debt with money that often counts as income, which could put you over the cap for ACA tax credits! It’s important to determine whether that will be the case for your unique situation. If so, it may be wise to pay off your mortgage during your working years.
Understand Medicare Coverages and Exclusions
Once you are eligible for Medicare coverage, you have two main options when enrolling. You can choose “Original Medicare” or “Medicare Advantage,” also known as a Part C plan. There are pros and cons of each. Understanding the differences can help you choose the plan that best fits your needs.
Original Medicare includes Part A, or hospitalization coverage, and Part B, which is medical coverage. You can also add Part D, which covers prescription drugs, and supplemental insurance to help pay costs you’re responsible for. You can use any doctor or hospital that accepts Medicare.
Medicare Advantage is a relatively new option in which you’re insured by a private company that has agreed to follow Medicare rules. You’ll get Parts A, B, and usually D as part of the plan, and commonly you’ll get extras not covered by Original Medicare, such as vision and dental coverage. Medicare Advantage plans can have lower out-of-pocket costs than Original Medicare. However, you will usually be limited to using in-network doctors and facilities.
If all that sounds complicated, it’s because it is! It’s so complex, people make entire careers out of understanding Medicare. Just as you would not enter retirement without the assistance of a financial planner, you should also not try to undertake Medicare planning by yourself. At Asset Preservation Wealth & Tax, we have our own Medicare expert to help our clients and retirement planners navigate the program’s complexities. Not all financial advisory firms have Medicare experts at the ready, however. If yours does not, ask for recommendations for one you can speak with. Making decisions armed with good advice and the right knowledge is an extremely important part of a successful retirement.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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