Victor Colella: Hi, everyone. This is Victor Colella and I’m a financial planner here at Adviser Investments. We’re here today with another Adviser You Can Talk To podcast. I’m joined by two colleagues of mine who I work with on a regular basis—both certified financial planners, both very smart guys. Brad Sharp is a vice president here at Adviser Investments and Andrew Busa, who you all know and hopefully love from prior episodes, is a financial planner in our central planning group.
Victor Colella: We have wanted to tackle Medicare planning for a while, but we recently got a suggestion from a listener who had some questions about Medicare and we like to prioritize our listeners’ suggestions when we can. So today it’s all about Medicare, and I’ll just start at a high level: It has been around since 1965.
The purpose is to give retired individuals over 65 a way to get basic health insurance. You do have to be 65 but you don’t have to be retired. Whether you know it or not, you’ve probably been paying for this your whole life. It’s part of that FICA tax that you may have seen on your pay stubs over the years, so it’s subsidized—the idea being that it’s more affordable than what you could otherwise get in retirement for health coverage if you didn’t have Medicare.
Victor Colella: I’m going to stop there and kick it over to Andrew so he can give you some of the basics of Medicare.
Andrew Busa: Right, so Medicare has separate parts that cover different things, unlike what you’re probably used to with a health plan that you’re receiving through your employer if you’re still working. The first two parts, this is original Medicare parts A and B, these are going to be the same for mostly everybody, and Part A is going to cover your hospital bills. This is going to cover room and board in a hospital, hospital care and things like surgery. Part B is more outpatient benefits, so this is going to be visiting your regular doctor, your physician, things like that.
Victor Colella: One thing to emphasize here is that although A and B are original Medicare, they in no sense cover everything that you’re used to your health insurance covering. There are some pretty significant gaps, and that’s one thing that’s a common misconception. Folks think, “I can just get A and B and I’m going be covered.” That’s not quite the case.
Andrew Busa: Exactly. So there are supplements to parts A and B that are designed to fill in those gaps that original Medicare doesn’t cover. There’s Part D prescription coverage. Believe it or not, prescriptions aren’t included in A and B. Then there’s Part C in Medigap. You might have heard of these. So what’s the very basic difference? Well, Part C, you might have heard this referred to as Medicare Advantage plans. Part C plans essentially replace your A and B coverage with one comprehensive plan that covers everything, including prescriptions. So availability of a Part C plan is going to vary based upon where you live, and Part C plans also operate within a network of services and doctors—similar to an employer health plan. So this might feel more familiar to you.
Andrew Busa: Medigap, on the other hand, acts as a supplement to parts A and B. These are going to be available in all 50 states. These plans are standardized, and Medigap is going to be accepted by all Medicare providers, whereas again, Part C is more of a network covering your doctors. And you’re going to need a Part D Prescription plan separately if you opt for the Medigap path. We’ll talk about the different pathways later on in this podcast.
Victor Colella: Yeah, this is where it really gets confusing: When you’re saying, “What am I going to add on top of the original Medicare?” Just to summarize, and we’ll summarize this again, in effect Medigap supplements A and B, whereas Part C replaces A and B. Again, there’s a lot here so we’ll come back to this again.
Victor Colella: Sorry, I’m going to cover a little bit of the basic costs and enrollment. I’m going to start with the good news—Part A, I’m going to go down the line. Part A is free for most everyone. Now I say “free” lightly because you’ve really been paying for it your whole life. But usually it is no additional cost, and that’s as long as you qualify for a Social Security benefit. As long as you have 40 quarters, or 10 years, paying into Social Security, Part A is not going to cost you anything.
Victor Colella: Now, regarding enrollment… If you’re taking Social Security benefits, you’re automatically going to be enrolled in Part A when you turn 65. If you aren’t yet taking your Social Security benefits, saying that maybe you’re deferring until 70 or you’re waiting until you’re fully retired, you have to enroll yourself.
There’s a window that opens three months before your birthday, your 65th birthday, and closes again three months after your 65th birthday. There are only a couple reasons why you wouldn’t enroll in Part A at age 65—one of them being if Part A isn’t free for you. Maybe you don’t have the qualifying quarters for Social Security. You obviously don’t want to start paying for Part A unless you already have lost your employer coverage because you retired. If you still have employer coverage and you’re still working, typically you’ll defer Part A.
Victor Colella: The other instance, and this ties into a prior podcast, is if you want to continue contributing to your health savings account. Just as a reminder, you can no longer contribute to an HSA or health savings account once you begin taking Medicare. You want to defer until you’re retired and can no longer contribute.
Victor Colella: Alright, so now I’m going to move on to Part B: Part B, this one isn’t free. This is, again, the outpatient coverage that Andrew talked about before. This can cost anywhere from $135 per month, up to almost $500 per month based upon your income. It’s actually based upon your income from two years prior.
For example, your 2019 Medicare cost would be determined by your… I’m doing some quick math here … 2017 income. Not taxable income, but it’s another number on your tax form. If you’re retired though, you don’t have to start at 65. As it relates to enrollment, if you’re retired you can wait until you’re fully retired, at which time a special enrollment period opens, which is eight months from your day of retirement — when your healthcare coverage ends with your employer, that you have eight months to enroll in Medicare Part B.
Victor Colella: If you don’t enroll in Medicare Part B within that eight-month period you actually do get penalized for missing your special enrollment period, or your original enrollment period That penalty is 10% every year. That’s a permanent increase in your premiums, so that 10% increase stays around for the rest of your life.
Brad Sharp: Yeah, Victor, I think this is an extremely important point from a planning aspect that the client makes sure that they do not miss these deadlines. Within eight months of leaving or separating from employment, you need to make sure that you are signing up properly for your new coverage to avoid any type of permanent increases to your premiums — very, very important.
Andrew Busa: If you walk away with even one thing today, we want you to put on your calendar, your phone, a reminder, either three months before your 65th birthday or when you retire, that you need to begin the enrollment process to get in touch with the Social Security Administration. This is money that you don’t have to spend if you enroll on time.
Victor Colella: As soon as we’re done recording I’m going to ask Siri to make that reminder for me!
Andrew Busa: Yes, you should—exactly.
Victor Colella: Alright, so I’m going to continue with cost in enrollment. We haven’t covered Parts C, D and Medigap. Enrollment for Parts C, D and Medigap typically follows your Part B enrollment. Enrolling in Part B starts a very important clock to enroll in your Medigap plan or Part C Advantage. If you miss this six-month window that starts when you enroll in Part B, sometimes Medigap plans can begin denying you for pre-existing coverage. That’s a big problem, and it’s an easy one to avoid as long as you pay attention to these deadlines.
Brad Sharp: I think one of the things as financial planners that we’re concerned about for folks moving into retirement is planning accordingly for escalating healthcare costs throughout the rest of their lives. Normally we would use a rate of inflation around 2–2½% for groceries and utility bills, but for healthcare expenses in particular, we’re using a 5½% inflation rate for healthcare expenses. This becomes a very large expense for you in retirement. I think it’s also important to note that Medicare is not a replacement for a long-term care policy. We don’t want to rely on Medicare for nursing home costs or long-term care expenses down the road. The bottom line is that basic Medicare Part A and B needs to be supplemented. There are things like a donut hole that need to be considered and out-of-pocket maximum limits when doing a financial plan and focusing on retirement expenses.
Victor Colella: Great. Alright, so I want to do one last summary. I think, Andrew, you’re best suited for it. Really there are two pathways you always like to talk about that you can take.
Andrew Busa: Right, and this whole thing can really feel like a maze to clients. There are a lot of different options out there. We’re going to boil this down to make sure, okay, so there are two pathways that you can think about to make sure that you have comprehensive health care coverage throughout your retirement: Pathway one is you enroll in original Medicare. Again that’s A and B, and then you enroll in a Medigap Supplement policy as well as Part D Prescription coverage. Just to remind you, anyone who accepts Medicare is going to accept Medigap. Medigap is available in all 50 states. Keep in mind that six-month window after you enroll in Part B that you need to get started with you Medigap enrollment so you’re not denied on pre-existing conditions.
Andrew Busa: That’s option one. Option two is that you enroll in original Medicare, that’s A and B. Then you enroll in a Part C Advantage Plan with prescription coverage. So, again, this is going to essentially replace your Medicare with an all-in-one plan that’s going to cover everything. Part C is going to be more network conversations with your doctors, and availability is going to vary based upon where you live. If you’re living in an area, you go online at Medicare.gov and plug in your zip code. If you don’t have a Part C Plan available to you, you know that you’re going to be opting for option one. Okay, so those are the two options that we look at.
Victor Colella: Alright, so before we all fall asleep, I’m going to step back from the details for just a second. Brad, you have a lot of clients who go through this. Can you talk a little bit about how they feel about the process—just how does it go, more practically speaking?
Brad Sharp: I think a lot of people are intimidated by all of the abbreviations and acronyms and what it all means. It has been very easy throughout their lives and working lives to just rely on your employer’s healthcare plan. Well, now you’re having to make some big decisions that will impact the rest of your life. Luckily, most of my clients have said that the experience has not been very difficult: It has been very straight forward using the website and local knowledge.
A lot of people tend to talk to their friends and family members who have been through it before, and the process is not too daunting. So don’t be intimidated by it. Again, reminders today are just focusing on those windows and periods that we need to make sure that we adhere to to avoid large penalties or being excluded—or paying additional amounts for coverage that we really don’t have to if we stick to some of these important dates.
Brad Sharp: It’s really important to be talking to your financial planner or financial adviser about these items well ahead of your 65th birthday—lots of things to consider and plan for in the way of what your income is going to look like approaching that two-year window that Victor mentioned earlier. How can we manage that? Is it important to have an HSA? Does that impact my income? There are a lot of questions that should be discussed with your financial planner around this topic.
Victor Colella: Definitely. And this is actually, Brad, you mentioned the two-year lag on premiums effected by your income. That was actually our listener suggestion. He directly talked about how he successfully appealed an increase in premiums based upon income from two years prior, which no longer was part of his reality.
This is really important. It’s not a complicated form. It’s called Form SSA-44, and basically what you’re doing with that form is telling Social Security that the income from two years prior, maybe it was an asset sale that spiked your income or you were working two years ago and now you’re retired. You’re informing the Social Security Administration or the Medicare folks that that’s no longer the case and you shouldn’t have to pay that higher premium. It’s a one-page form; it’s not that complicated, and sometimes it can save you big money on premiums. So, don’t just accept that increase in premium on face value.
Brad Sharp: Oh that’s exactly right, and this client in particular forwarded the form to both myself and the C.P.A. to include us in the conversation to see if we could help. I think in the end there was a benefit to all three parties being more involved and inclusive in the relationship and understanding the impact that that income was going to have on the retirement success of this individual.
Again, don’t be intimidated: If something doesn’t look right, reach out to your other team members—whether it’s your C.P.A., your attorney or your financial planner—to get assistance. We don’t want to pay an additional amount when we don’t have to based on changes in your income.
Victor Colella: Yeah, it’s a big point. Alright, I’m going to summarize the key takeaways here. Or at least I’m going to give it a shot. First, put it on your calendar. When you’re 64 and three-quarters or when you plan to retire, don’t delay the Medicare application process because it could end up costing you money for the rest of your life. Set that reminder for your 64th and three-quarters birthday, or again—if you’re going to retire after that—upon your retirement.
The second piece is, as Brad said, start planning early. If you start planning early, it could save you big money in healthcare premiums during your retirement, and that’s mainly because that connection to your income. If you can get your income down in retirement or potentially appeal cost increases that may happen, that could save you some money as well.
Victor Colella: I alluded to it, but appeal cost increases if they happen. It could save you some money on Part B premiums. You don’t know unless you try and it’s a fairly simple form. Alright, so if you want to get started… Maybe you’re listening to this and your 65th birthday is tomorrow. Go to Medicare.gov, type in your zip code and look at what plans are available to you. Some states also have a service where they provide counseling, I think it’s free counseling regarding helping you choose your Medicare options. Then finally, you can also schedule an appointment with the Social Security Administration. Brad, Andrew, do you have anything to add that I may have missed?
Brad Sharp: Yeah, I think it’s very important to know that at Adviser Investments, we’re here to help. This is a situation that normally you will only navigate once or twice—in the case of your spouse—during your lifetime. We’re helping clients on a daily basis with this tough task of making sure you’re getting signed up correctly for your medical insurance that’s going to last you throughout retirement. Don’t be afraid to ask for help. This is not something that you have to do on your own.
Victor Colella: Great. On that note, if you’re still not feeling like an expert on Medicare, not that we expect you to be, we actually created a one-page companion piece called “Medicare Made Simple.” This is just a quick summary of what we talked about because I know it’s a lot of information. If you’re interested you can check it out by clicking this link in the episode description.
Victor Colella: This has been Brad Sharp, Andrew Busa and Victor Colella from Adviser Investments, and we thank you for listening to another Adviser You Can Talk To Podcast. If you’ve enjoyed this conversation, please subscribe and review our show. You could also check us out at https://www.adviserinvestments.com/podcasts/, and don’t forget, today’s podcast was listener-suggested. We love when suggestions come in. There are a lot of topics we can talk about, and knowing what you want to hear from us really helps. Your feedback is truly welcome. If you have any topics you’d like us to explore, we’d happily do a podcast for you. Just send us an email at email@example.com if you have any suggestions. Again, that’s firstname.lastname@example.org. Thanks for listening!