When it comes to retirement, planning for Medicare is a big thing you have to consider. It is important to plan for Medicare so you can optimize how much you’ll pay for it, what benefits you need, when to get on Medicare, and more! Keep reading for these tips, as well as a key strategy for getting around high Medicare premiums.
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Medicare 101: Understanding the Basics
When you’re considering Medicare, it’s important to understand the basics because it is so complicated! Once you layer on different plans, mailers, and more, it can be very overwhelming. You may even feel like if you make the wrong decision it’ll be irrevocable, which is true in some cases. For this reason, we want to make sure you’re well educated in this critical decision that will impact you throughout retirement.
To start, there are many different types of Medicare. There’s Medicare A, Medicare, B, Medicare C, Medicare G, and more. Medicare A is something you’re forced to get onto if you want your Social Security benefit, since you have to have Medicare A to get your Social Security benefits. When you turn 65, even if you’re with an employer healthcare plan, many employers will encourage or make you get on Medicare Part A, which is the hospital portion of Medicare. Luckily, Medicare Part A does not cost anything.
Once you’re 65, you’re eligible for Medicare B, Medicare D, Medicare F, and potentially a supplemental. At this point, you’ll want to consider if you need that at the time. If you’re still working, you may prefer to stay on your employer’s health plan. Although, some employers may make you get on Medicare at age 65. If you’re getting on Medicare at 65, there are a few things you need to know. You need to stay within your window: 3 months before you turn 65, the month you turn 65, and three months after. If you’re 65 and you’re not on an employer-sponsored plan, you should not miss this window. If you do miss this window, you’ll face a penalty that will stick with you for life. This penalty increases the longer you wait to sign onto Medicare, so make sure you’re paying attention to that window.
Let’s dive into the other types of Medicare. To start, Medicare B makes your Medicare very comprehensive, covering doctor’s visits alongside hospital care. Then, you have Medicare D, which rolled out in the early 2000’s and covers a good majority of your prescription drugs based on zip code. Finally, Medicare F is the supplement and fills the gaps that Medicare A, B, and D don’t cover. Many people also consider a Medicare Advantage plan, depending on their individual needs. To make sure you get the right coverage, you need to consult with a Medicare specialist.
Importance of Medicare Timing
One more thing you need to consider is the timing. Many families we work with at REAP Financial work up to age 65, simply because they want to. This can be a magical number for many people, since working until age 65 allows you to keep your employer health care, until you’re eligible for Medicare. If you do decide to retire earlier, there are options for health care in the meantime, including Cobra through your employer for generally up to 18 months, an exchange plan, or an Obamacare plan. If you intend to retire early, make sure that you take this into consideration, since these healthcare plans can cost between $800-$1000 per person. When taking on one of these health care plans, you need to ensure your portfolio can sustain the short-term budget increase, until you can get on Medicare.
Medicare can be rather affordable and comprehensive. When it comes to Medicare premiums, your premiums are dictated by your income. The government will set your Medicare premium cost based on the last two years of tax returns. If you have income above a certain income, you’ll pay more. There are six tiers that you may fall into. The good news is that your Medicare premiums can change throughout your retirement, based on how your income changes. So, if you have a large income one year, you may see an increase in your Medicare premiums. For this reason, it is important that you consult with a fiduciary advisor and Medicare specialist so you know exactly what to expect.
A Key Medicare Strategy: the SSA 44 Form
We’re going to let you in on one key strategy that many CPAs don’t even know about. It’s called the SSA 44 Form. This form allows you to notify the Medicare association that you’re retiring in a given year or “work stoppage.” Since this form lets them know you’re stopping work, they can then grant you a one-time exemption on the increased premium, to account for that upcoming drop in income. Retirement is one of the 8 qualifiers on the SSA 44 Form, which can save you time and money. You can leverage this in your first year of retirement, no matter what age you are.
As discussed, since your Medicare premiums will vary based on your income, you may end up paying far more than others for the same coverage. There are those 6 income tiers that will be used to dictate your premium. In 2024, the base premium for the average person on Medicare A, B, and D is between $300-$400 per person. When you compare it to the Cobra or Obamacare plans, that sounds really reasonable. However, we work with many successful families at REAP Financial who retire with lots of assets and have a nice income. In this case, with higher income, you may be paying up to $600 a month. While this is only a $200 difference a month, throughout your retirement it can add up to hundreds of thousands of dollars.
You can control this in many cases. We refer to this as the “American Stealth Tax.” Though it’s not actually a tax, we refer to it this way because you may be paying more for the same coverage. The average American hasn’t saved anywhere near $100,000 to hundreds of thousands of dollars for retirement. So, the idea that you could be paying a lot more for your Medicare coverage over the course of your retirement can feel unfair. That’s why it’s so important to pay attention to this and plan for it.
First, you’ll want to identify how much income you’ll have in retirement. This includes where you’ll pull the income from and if you can reduce it via favorable tax accounts, such as Roth IRAs or Roth 401ks. This comes as a surprise to many retirees, since the bulk of most Americans’ wealth is in Roth accounts, which have never been taxed before and comes out as income. If you’ve successfully planned for retirement, you’re likely to have nearly the same income as when you were working.
Even if this isn’t true right when you retire, it’s likely you’ll get there by the time you reach age 73 or 75. That’s because at one of those ages, you’ll have to start taking required minimum distributions. This is where the “stealth tax” kicks in and impacts families. If you have high required minimum distributions, based on what you have in those accounts, you may see your income rise substantially and your Medicare premiums rise with it. In many cases, this increase is pretty consistent, since your RMDs tend to go up as you get older, if you have a large balance in your account.
At REAP Financial, it’s not uncommon for us to see families climb tiers throughout their retirement. If left unchecked, it can turn into a snowball effect, where you’re constantly paying more for your premiums and putting strain on your budget in retirement. That’s why we centralize the importance of getting control of your tax bracket in retirement, positioning your wealth such that you have plenty in the bank, but you’re “poor on paper” with your income under control. If you plan for this properly, you can save lots of money in retirement through those lower Medicare premiums. Those savings can unlock tons of potential, whether you want to travel the world, give to causes you care about, take care of loved ones, or more.
As you can see, Medicare is complicated! However, with proper guidance and education, you can make educated decisions and save in the long-run. If you’re interested in learning more about the “American Stealth Tax” or other important retirement considerations, check out more articles on our website at reapfinancial.com/blog!
If you’re in the Austin, Texas area and would like to ensure you’re taking all the necessary steps to ensure the highest level of success in retirement, speak with one of our retirement or financial experts today.
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