Probably no other aspect of Old School Retirement—or more precisely, of turning sixty-five—creates more bewilderment than Medicare.
On one hand, it sounds like a wonderful thing: Federally subsidized healthcare! Yippee!
On the other hand, it seems maddeningly complex, and you still have to buy supplementary insurance, and every time you turn on the TV you see an aging Hollywood actor pitching a Medicare supplement plan and warning about the dire consequences of not having one.
Before we go any further, let’s be honest. It’s very possible that you don’t care about Medicare or Social Security because you’ve got piles of money and can write a check every month for five thousand dollars to pay for a Cadillac health plan, and you don’t need Social Security benefits because they’re just chump change. If this is the case, and your estate is under the care of a first-class financial services firm, then you can safely skip this chapter.
But if you’re among the 99 percent of Americans who, even if they are wealthy, need to pay attention to the cost of healthcare and the impact of Social Security on their checkbooks, then you need to face the monsters of Medicare and Social Security and at least learn the basics.
You might say, “Chip, I’ve got a guy who handles all that stuff for me. I don’t need to know about it.” Okay, but if Medicare and Social Security are of the slightest importance to you, then you should be an educated client who can discuss these issues intelligently with your advisor. You need to know the lingo and how the system works. Remember, to reach your retirement remix, all you need is an open mind, the desire to make your dreams come true, and the financial and life skills to sustain yourself in the manner to which you aspire. The last point is important. After all, it’s your money, and how it’s apportioned is your business.
Here are the basics of Medicare. You can learn much more on the Signature Wealth Group blog, or just give us a call!
While a federal medical insurance program for senior citizens had been discussed in the 1950s, the Medicare program as we know it, was signed into law in July 1965 by President Lyndon Johnson. That year, Congress enacted Medicare under Title XVIII of the Social Security Act to provide health insurance to people age sixty-five and older, regardless of income or medical history.
The Centers for Medicare and Medicaid Services (CMS), a component of the US Department of Health and Human Services (HHS), administers Medicare, Medicaid, and various other programs. Medicaid is a government insurance program for persons of all ages whose income and resources are insufficient to pay for health care. It is a means-tested program (meaning you have to qualify), jointly funded by the state and federal governments and managed by the states.
Medicare has long been a popular program. As of 2017, 56 million people—17 percent of the US population—relied on Medicare. By 2024, it’s expected that Medicare will cover one-fifth of the population.
If you are sixty-five years of age or older and have been a legal resident of the United States for at least five years, then you qualify. There is no “means testing.” You have the right to sign up.
Other people who may qualify include those under sixty-five with a disability, if they already receive Social Security Disability Insurance (SSDI) benefits. Specific medical conditions may also help people become eligible to enroll in Medicare.
You do not have to wait until you’re sixty-five to enroll. You can enroll anytime during the three-month period before your birthday. In fact, Medicare recommends doing this so that your coverage can start as soon as you’re eligible. You can apply during any of the seven months that make up what’s called the Initial Enrollment Period. This includes the three months before your birth month, the month of your birthday, and the three months after your birth month.
If you take Social Security benefits, you’re automatically enrolled in Medicare. I’m assuming that you are not taking Social Security benefits at age sixty-five. This is because you want the maximum benefits, and you’re going to delay them until you’re seventy years old. More on that topic later.
To make it super-confusing, various plans and “parts” exist under the Medicare name. Here’s a quick guide.
Parts A, B, C, D: Overview
“Original Medicare” is the program offered by the federal government. It consists of Part A and Part B.
Part A is hospital insurance. It also covers brief stays for rehabilitation or convalescence in a skilled nursing facility. The standard Part A premium is currently $437 per month, but you may qualify for free coverage.
Part B is medical insurance. You pay a premium each month for Part B. For complete details, ask your financial advisor or check with www.medicare.gov for the most up-to-date information.
Parts C and D are “supplementary Medicare plans.” Since we live in a freewheeling capitalist society, it’s hardly surprising that private insurers have devised various plans to piggyback off original Medicare and get you to pay to “fill in the gaps” for services that Medicare doesn’t cover.
Part C includes various health plans sold by private insurers. It’s like signing up for original Medicare through a private broker, who then bundles it with additional services provided by the private insurer.
Part D covers prescription drug plans.
For most people heading into retirement, the big question is: “How much is healthcare going to cost me when I’m seventy, eighty, or ninety years old?”
According to Fidelity Benefits Consulting, it is estimated that the average couple will need $285,000 in today’s dollars for medical expenses in retirement, excluding long-term care. This is based on a hypothetical couple retiring in 2019, each at age sixty-five, with average life expectancies.
It’s also estimated Medicare will cover only about 50 to 60 percent of your healthcare needs. And, over time, premiums and out-of-pocket costs will go up.
For a male, age sixty-five, thebalance.com estimated total premiums and out-of-pocket costs at about $4,500 a year. That works out to $375 a month. It’s also likely that these healthcare costs will rise at about double the rate of inflation. Using a six percent inflation rate, ten years into retirement the original $375 a month could balloon to $675 a month.
You can use an online health care cost calculator. (These days, there’s an online calculator for just about everything.) I did a hypothetical calculation on the Health View Services website. It asks you your marital status (for my pretend user, I entered “single”), gender (male), state (for fun I entered “Alaska”), projected income range in retirement of “$107,000 to $160,000,” and for health problems I checked “high blood pressure” and “high cholesterol.”
For current household income, I entered $200,000. The hypothetical total value of my 401(k), 403(b), 457(b), and IRA accounts was $750,000. Total value of all other investments was $800,000.
I clicked “submit,” and was greeted by a page asking for my contact info and email address. Of course—how naïve of me! So I plugged in the info.
The message said I would get my free report in an email.
Voila! A few minutes later, it arrived. The report informed me that according to Health View’s actuarial-backed projections, my basic health care expenses will total $241,745. This “basic” calculation did not include projections for supplemental insurance (Medigap), Medicare Part C (Medicare Advantage), or out-of-pocket expenses.
It said my life expectancy was 84 years. I was hoping for longer… perhaps my hypothetical retiree should work on getting his blood pressure and cholesterol down.
The report also informed me that a monthly investment of $1,322 would be sufficient to generate enough income to cover my medical expenses in retirement.
While these online tools are interesting, to create a realistic budget you should consult with a qualified financial planner.
What Other People Do
In case you’re curious about the choices other people make, Vanguard’s Investor News reports these numbers:
For a typical woman age sixty-five, the Mercer-Vanguard model predicts an annual health care expense of $5,200 in 2018. Given the wide variety of potential outcomes, long-term care costs represent a separate planning challenge. While half of all retirees will incur no long-term care costs, there’s a small, but very real risk, that costly care will be required for multiple years.
Enrollee’s choices of plans:
Traditional Medicare with employer-sponsored coverage – chosen by 35 percent.
Medicare Advantage with prescription coverage – 32 percent.
Traditional Medicare with prescription coverage and Medigap plan – 21 percent.
Traditional Medicare with prescription coverage – 12 percent.
Loss of employer subsidy:
If an employer has been paying a portion your health care costs, when you retire, the loss of those subsidies can make your retiree health insurance costs feel much higher. The average retiree loses $5,300 in employer-provided healthcare payments per year. If you retire before age sixty-five, you may need to pay 100 percent of your healthcare costs until you turn sixty-five.
For high-income taxpayers (as of this writing, singles with expected income of $85,000 or more, or married couples at $170,000 or more), the more you earn, the higher your Medicare Part B and Part D premiums will be. Work with a good tax planner or retirement planner to manage distributions more efficiently, and potentially keep your Medicare premiums from rising.
In the retirement remix, the possibility of continuing with paid employment after the age of sixty-five is very real and, for many people, very attractive. Therefore, the million-dollar question is, “If my Social Security stops because of the amount of my earnings, can I still keep my Medicare?”
The answer is that in this instance, Medicare and Social Security benefits are different. If you qualify for Medicare based on your work history, you can sign up for Medicare when you turn sixty-five, regardless of your income. You keep working and make as much money as you want, and you will not be kicked off Medicare.
The only penalty you might face is that your extra income could trigger surcharges for Parts B and D. As usual, my best advice is to consult a qualified tax expert or retirement financial planner.
The Other Monster, Social Security
Having squared off against the Godzilla of Medicare rules and regulations, let’s tackle the King Kong of Social Security.
In terms of the retirement remix, the million-dollar question is this: “If I keep working and earning income, how will that affect my Social Security checks?”
Unlike Medicare, whose benefits do not change if you have income or your income rises while you’re active with the program, Social Security is different. Because it’s designed specifically to supplement your retirement income, it’s sensitive to your income level while you’re active with the program.
The amount of money you will receive from Social Security is variable, depending on two metrics:
- The date you apply and begin taking payments.
- Your income from employment, both historically and after you begin taking payments.
For purposes of this discussion, let’s assume you are neither disabled nor have other special considerations. You’re just a regular worker.
When You Start Taking Payments
Social Security is funded by your tax payments you’ve made on your income during your life. Then, when you sign up, you start receiving cash payments—the monthly checks in the mail. Generally, you should apply for retirement benefits four months before you want your benefits to begin.
Your age at signing makes a difference in how much money you get each month.
Social Security makes a significant distinction between being eligible for payments and your “full retirement age.” You can claim benefits at any time between age sixty-two and full retirement age, which eventually will be age sixty-seven for everybody. If you start benefits before your full retirement age, your benefits are reduced a fraction of a percent for each month you’ve signed up before your full retirement age.
Depending on what year you were born, your full retirement age can range from sixty-five to sixty-seven. Social Security publishes a chart showing the sliding scale of when you will reach full retirement. You can access it at https://www.ssa.gov/planners/retire/retirechart.html.
This is because when Social Security was first established, retirement was age sixty-five. But because of the pressure on the system, the age is being gradually raised to sixty-seven. To avoid “sticker shock,” Social Security devised a sliding scale that gradually raises the retirement age as you get younger. For people born in 1937 or earlier (eighty-two years old in 2019), full retirement is age sixty-five. At the other end of the scale, for people born in 1960 and later (fifty-nine years old and younger in 2019), full retirement age is sixty-seven years old.
Eventually, it will be sixty-seven for everyone.
Why does this matter? Because the longer you wait to claim your cash, the more you receive. It’s a sliding scale. It begins at age sixty-two, when you can first claim benefits. At that age, you will receive only 75.0 percent of your maximum benefits, for as long as you live.
If you wait and claim your benefits at age sixty-seven, you’ll receive 100 percent of your monthly cash payment, for as long as you live. (To be precise, the full benefit age is currently sixty-six years and two months for people born in 1955, and it will gradually rise to sixty-seven for those born in 1960 or later.)
But for the retirement remix, it gets better! Social Security retirement benefits are increased by a certain percentage (depending on date of birth) if you delay your claim beyond full retirement age, up to the age of seventy. If you delay benefits past your full retirement age, up to age seventy, your year of birth and the number of months you delay determines how much your benefit can increase.
After age seventy, there is no more increase. Seventy is the final cutoff age.
This is the bottom line: To receive the maximum amount possible from Social Security, claim your benefits when you turn seventy years old, and not before.
To be fair, there are advantages and disadvantages to taking your benefit before your full retirement age, or before age seventy. The advantage is that you collect benefits for a longer period of time. The disadvantage is your benefit amount is reduced. Each person’s situation is different, and you need to decide what’s right for you. But once again, I repeat: if you don’t need the money, don’t claim Social Security benefits until you are seventy years old.
However, you should enroll in Medicare when you turn sixty-five. There’s no harm in signing up, and there may be additional costs if you delay.
You can check out ssa.gov’s “Early and Late Retirement Calculator” to plug in your year of birth and see how delayed retirement affects you. For example, I entered the birth year of 1955. As of this writing, the full retirement age for that birth year is sixty-six and two months.
A person born in 1955 who first claims benefits at age sixty-two will receive only 74.2 percent of their benefits.
A person born in 1955 who first claims benefits at age sixty-six and two months will receive 100 percent of their benefits.
But hear this: A person born in 1955 who first claims benefits at age seventy will receive 130.7 percent of their benefits.
Penalties for Earning Money
Unlike Medicare, which applies only a minimal additional cost on people who keep earning money beyond sixty-five, Social Security is different. If you take Social Security benefits before your full retirement age, there is a means test. The program seeks to subsidize your income up to a certain level. If you don’t need the subsidy because you’re making money, your benefits are reduced.
In their calculation of earnings limits, Social Security counts only wages from a job, whether from an employer or self-employment. They don’t count income such as other government benefits, investment earnings, interest, pensions, annuities, and capital gains. They do count an employee’s contribution to a pension or retirement plan, however, if the contribution amount is included in the employee’s gross wages.
Here’s an example of how benefits are withheld:
- If you were born January 2, 1957, through January 1, 1958, then your full retirement age for retirement insurance benefits is sixty-six and six months.
- If you’re currently younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits. If you’re younger than full retirement age during the entire year, Social Security will deduct $1 from your benefits for each $2 you earn above $17,640.
- If you reach full retirement age during the year, Social Security will deduct $1 from your benefits for each $3 you earn above $46,920 until the month you reach full retirement age.
- If you are at full retirement age or older, and you work, then you may keep all of your benefits, no matter how much you earn.
It’s worth noting that if your Social Security payments are reduced because you earned income above the limit, spouse(s) and children receiving benefits on your work record will have their payments reduced as well. The earnings cap and rules also apply to the work income of people receiving spousal, children’s, and survivor benefits.
The Silver Lining
If your benefits are reduced because of gainful employment, the good news is that your benefits are merely suspended, not eliminated. As the Social Security publication How Work Affects Your Benefits says, “The amount that your benefits are reduced, however, isn’t truly lost. At your full retirement age, your benefit will increase to account for benefits withheld due to earlier earnings.”
It’s all based on the sliding scale of benefits paid between age sixty-two and full retirement age, which varies but will eventually be sixty-seven. Your benefit level is determined by the age at which you first claim benefits. The earlier in life you claim benefits, the less you get—forever. But if you claim benefits and then work, when you reach full retirement age the date at which you first applied may be changed, as if you had actually applied later, and therefore you qualify for a higher benefit rate.
Here’s an example provided by Social Security:
“If some of your retirement benefits are withheld because of your earnings, starting at your full retirement age your monthly benefit will increase to take into account those months in which benefits were withheld. As an example, let’s say you claim retirement benefits upon turning 62 in 2019, and your payment is $942 per month. Then, you return to work and have 12 months of benefits withheld. At your full retirement age of 66 and 6 months, we would recalculate your benefit and pay you $1,007 per month (in today’s dollars).
“Or, maybe you earn so much between the ages of 62 and 66 and 6 months that all benefits in those years are withheld. In that case, we would pay you $1,300 a month starting at age 66 and 6 months.”
Let’s say you first apply for benefits at age sixty-two. It is January 2020, and your date of full retirement (according to Social Security) is January 2025. This means you will receive only 75 percent of what you could have received had you waited until full. But during the time until your full retirement, you work and earn money for a total of twelve months. When you reach full retirement, Social Security will recalculate the date when you first applied, and move it up to January 2021, when you are sixty-three years old. This means that now, you’ll receive 80 percent of your maximum, which is better than 75 percent.
In addition, let’s say that beyond sixty-two, you keep working and actually have a very good year and make more money than you usually did. Each year, Social Security reviews the records for all Social Security recipients who work. If your latest year of earnings turns out to be one of your highest years, the agency recalculates your benefit and pays you any increase due. This is an automatic process, and benefits are paid in December of the following year.
The above article originally appeared as a chapter in The Retirement Remix and is reprinted with permission from the author Chip Munn. No parts of this article may be reproduced without correct attribution to the author of this book.
You can find the full book here.