The Overlooked Piece of Retirement Planning

Medicare is not free, and not all Medicare plans offer the same coverage or charge the same amount. Now, during Medicare's annual "open enrollment period" from October 15 to December 7, is the time of year to compare your plan with the alternatives in your state.

If you are 65 or over, you can join, switch, or drop a plan without a penalty during open enrollment. Be aware that what you do or do not do will affect the health care coverage you will get and the costs you will pay throughout 2023.

It is no small matter. A recent study published by the Center for Retirement Research, which is affiliated with Boston College, concluded that retirees pay from 12% to 37% of their income on health insurance premiums, deductibles, coinsurance, copayments and other medical costs.

To understand Medicare, you first need to know about the different parts and what you pay for in retirement. At age 65, Part A, which covers hospital costs, is "free" if you have earned it through 40 credits of qualified work. This covers hospital stays, surgeries, and long-term skilled nursing care.

Part B, which covers certain doctors, outpatient care and preventive care, comes with a fee. The monthly premium will be $164.90 a month in 2023, down from $170.10 in 2022. There are also deductibles and other out-of-pocket expenses.

The other parts of Medicare are run by private insurance companies according to rules set by the Centers for Medicare & Medicaid Services, a federal agency.

Part D is prescription drug coverage offered by private companies following Medicare's rules. Plan D premiums, which averaged $33.37 a month in 2022, cover some costs of medicine but also have a deductible and often a copay.

Supplemental policies, often referred to as Medigap insurance, help to pay Medicare copayments, coinsurance, deductibles and other out-of-pocket expenses. You pick which private insurance company to use based on what you want covered and what you can afford.

Medicare Advantage, previously called Part C, includes all the benefits and services of Parts A, B and D bundled together and offered by private insurance companies. These plans set a limit on the most you will have to pay out-of-pocket for covered services. In most cases, you will need to use doctors and hospitals who are in the plan's network.

As of June 2022, Medicare covered 58.5 million people. Most know that Social Security deducts Medicare premiums from their benefit checks every month or an insurer debits their bank account, but not all of them understand why they are paying the premiums — let alone how Medicare determines their premiums or how their financial decisions could affect what they pay.

Every year, the Centers for Medicare & Medicaid Services resets Part B premiums on a graduated scale based on participants' recent income. So, 2023 premiums were based on 2021 income, and 2024 premiums will be based on this year's income.

In practice, people earning less than $97,000 a year ($194,000 for couples filing jointly) in 2021 will pay a Part B premium of $164.90 per person per month in 2023, down from $170.10 in 2022. In the highest of six tiers, people who made $500,000 in 2021 will pay $560.50 per person per month in 2023.

Because the premium can vary by as much as $395.60 a month, this means that you save close to $4,800 a year with good planning — and double that much for a couple.

Be sure to consult a financial professional before you increase your income by converting your Tradition IRA to a Roth, selling your business or making an extra-large retirement account withdrawal. They will have suggestions on ways to save on taxes and Medicare premiums.

If you are 62 or younger, consider making your large financial moves now if you can. For example, if you plan on starting Part B coverage at age 65 (the earliest possible age) by doing a Roth conversion in 2022 instead of the year you turn 63, your premiums will be lower the first year you pay for Part B. This is because of the two-year look back.

Already on Medicare? There are appeal options if you have a life-altering event, such as death of a spouse or loss of a major income source. By making Medicare aware of your income change, you will not overpay unnecessarily.

As with most health insurance, premiums go up most years; however, the good news is that the monthly premium is going down by $5.20 per person per month for 2023.

If you are already covered by Medicare, you can use the open enrollment period to pick a different Medigap or Medicare Advantage plan for next year. As each of these private pay plans is state specific, start reading up on your options to pick the best one for you

If you pay your Medicare premium by having Social Security deduct it from your monthly benefit, you may want to see if you are eligible for protection against sharp premium increases. Medicare offers a "hold harmless" provision that caps the Part B premium hike if it rises faster than Social Security benefits.

There's one last mistake you can make that can increase your Medicare premiums — and unlike these other situations, it is permanent. Missing your sign-up deadline for Medicare will require you to pay a surcharge on your Medicare premium for the rest of your life. The sign up window is seven months wide — the three months before the month in which you turn 65, the month you turn 65 and the following three months.

A surcharge is added for each month you do not sign up for Medicare. The income-related monthly adjustment amount is a permanent addition to your Medicare premium for Parts B and D. There are exceptions to this rule if you qualify for a special enrollment period because you worked past 65 and had health insurance through your workplace or spouse, as well as international volunteers.

After that, each month that you qualify and do not join, you are subject to a penalty fee on your premium for the length of your enrollment. Overlooking this requirement when reaching age 65 could cost you for the rest of your life.

Christine D. Moriarty 



C.D. Moriarty, CFP, is a Vermont-based financial speaker, writer and coach. She can be found at MoneyPeace.com. Read More