By Michael Egan, CFP®
CERTIFIED FINANCIAL PLANNER™
Partner, Egan, Berger & Weiner, LLC
For the next 18 years, 10,000 people will turn 65 every day.
Why is that important? Because 65 is the age you need to start signing up for Medicare—the primary health plan that most Americans use in retirement.
The challenge is that most people are unsure of what to do and when to do it. This article will cover the basics and some key dates.
Medicare has four parts—A, B, C, and D.
- Part A: Helps pay for hospital bills. For most Americans, there is no monthly expense for this coverage since you and/or your spouse paid for this during your working career with Medicare taxes. Medicare taxes are currently 1.45 percent of your annual income (this is matched by your employer). Each hospital stay has a deductible that you pay ($1,184 in 2013). You need to sign up for Part A three months before you turn 65 to ensure coverage starts when you turn 65. If you don’t enroll by that date, you have until three months after you turn 65 to enroll. If you miss that date, then you have to wait until the next open season to enroll and you will have a coverage gap. If you are already receiving Social Security, you will automatically be enrolled in this coverage, but it is always good to double check.
- Part B: Pays the doctor bills and other related expenses. Unlike Part A, there is a monthly cost for Part B. The average American will pay $104.90/month (2013) for this coverage. If your annual income is above $85,000 (single) or $170,000 (married filing jointly), then your monthly expense will be higher. It can go as high as $336/month (2013) for top income earners. You also need to sign up for Part B when you turn 65 unless you have access to employer coverage from a company with more than 20 employees. It is always a good idea to check with your benefits department or healthcare provider to be sure. The recommended sign-up time is the same as Part A unless you continue to work after turning 65. If you do continue to work and are covered under an employer plan, then you need to enroll in Part B one to three months before your retirement/quit date. Note that COBRA coverage does not extend your deadline to apply for Part B. If you miss signing up during these periods, not only will you have a coverage gap, but you will also have to pay a higher premium for the rest of your life as a penalty.
Note: Part A and Part B are government-sponsored programs and can be initiated through Social Security or by going online to www.socialsecurity.gov and clicking the blue “Medicare” button. The remaining Medicare parts—C, D, and Medigap—are issued by private insurance companies.
- Part C: Medicare Advantage. This is an alternative to Medicare Parts A and B, and you must be enrolled in Medicare Parts A and B to elect a Medicare Advantage plan. It is commonly in the form of an HMO or PPO and covers most of the expenses not fully paid for by Medicare Part A and Part B. It also may offer some additional coverage for things like prescription drugs, vision, dental, etc. … In addition to the monthly price for Part B, you may also pay an additional monthly amount to the Medicare Advantage provider.
- Part D: The prescription drug plan. You must select this plan from a private insurer if you want prescription drug coverage, unless you choose a Medicare Advantage plan that has this coverage built into it. Plans have different deductibles, co-pays, and coverage in the “donut hole.” The donut hole is the gap in coverage (federal guidelines) that occurs when your annual prescription drug costs exceed $2,970 but are less than $6,734 (2013). You should sign up for Part D at the same time you sign up for Part B so that you avoid a permanent penalty, unless you have qualifying benefits through a retiree group plan that are equal to or better than the Part D coverage.
- Medigap: Insurance that is also selected from a private insurance company. Medigap helps cover such things as deductibles for Part A and Part B, co-insurance costs for doctor bills, and costs for extended hospital stays beyond the Medicare Part A maximums. You need to have signed up for Parts A and B to get Medigap coverage. People who choose this coverage use it in lieu of Medicare Advantage and then purchase a prescription drug plan (Part D) to go with it. The best time to enroll in a Medigap policy is the six-month period that begins on the first day of the month in which you turn 65 (or your retirement date if you are continuing to work and have health coverage through a large group plan [20+people]).
The Bottom Line
In summary, most people will need Part A, Part B, and either a Medicare Advantage plan or a Medigap plan with a prescription drug plan (Part D). The exceptions to this would be as follows:
- Federal employees with retiree health coverage sign up for Part A and nothing else. The federal plan covers everything else. In some cases adding Part B may minimize out-of-pocket expenses.
- Military retirees must sign up for Part A and Part B and then Tricare for life becomes their gap coverage and prescription drug coverage.
- All other retirees who have group health coverage in retirement may only need to sign up for Medicaer Part A and Part B since their group plan will act as their Medigap and prescription drug plan.
Yes, Medicare is a very complicated system. To make the process smoother, I recommend that you:
- Read the “Medicare and You” booklet. Download it free from medicare.gov.
- Check with your existing benefits provider or HR department before signing up for Medicare coverage. Note that even if you fully cover yourself with the appropriate parts, you will still have out-of-pocket expenses.
- Integrate your Medical insurance planning into your overall financial plan. Remember that the biggest expense that is not covered by Medicaer is long-term care. You will need to cover that risk with additional insurance or self-insurance.
Questions? Send me an email at firstname.lastname@example.org.
About Michael P. Egan, CFP®
A founding partner of Egan, Berger & Weiner, LLC Michael Egan has 21 years of experience in the financial services industry. He has been a mutual fund analyst, and an accountant and financial planner.
A graduate of George Washington University with a degree in Finance, Egan hosted a weekly radio show on financial planning in the Washington market. He has also been a presenter on retirement planning for Fairfax County Public School’s Adult and Community Education. Egan is an active member of the Financial Planning Association.
The son of Irish immigrants, Egan and his wife Terri have been married for more than two decades. Originally a native of Connecticut, he and Terri moved to Northern Virginia in 1990. An avid New England sports fan, Egan roots passionately for the Red Sox, Patriots, Celtics, and UCONN Huskies.