Making sense of the various parts of Medicare, what they cover – and often what they do not cover – as well as the costs and co-pays you are responsible for, is crucial to managing health care expenses after you turn 65.
The federal Medicare program represents an important resource to help manage care for Americans age 65 and over. Yet the program is not all-inclusive and contains many cost-sharing provisions such as premiums, deductibles and copays. These can lead to large out-of-pocket surprises for those unfamiliar with the program’s structure and limits. Supplemental insurance can help, but weighing your options requires first understanding the costs and gaps of traditional Medicare (A and B).
Part A covers short-term hospitalization, hospice and some home care
Part B covers preventive care for doctor’s visits and outpatient care
Gaps in Part A and Part B
With limits to the scope of traditional Medicare, enrollment in supplemental insurance has become more popular than ever. By understanding the role private insurance may play, you can select the coverage that helps you manage costs, coverage and care as you age. Understanding the choices includes knowledge of two specific paths to coverage.
Equally important as understanding the scope of Medicare and coverage gaps is planning for premium expenses. Sparked by a dramatic rise in enrollees and associated expenses, Medicare premiums continue to rise faster than Social Security’s cost-of-living adjustment (COLA). While many existing enrollees are protected from this scenario through the “hold harmless provision,” others like future filers and high income earners will bear the brunt of increased costs for the program.
When retirement comes early or is unexpected, it raises additional issues to consider. With corporate downsizing, business transitions and other factors, this is increasingly a reality for many older workers.
Leave the workforce earlier than planned3
Cite health as the reason for retirement4
When retirement comes early, bridging the gap between employer care and Medicare is important. Several options may be a fit:
If available, your likely least expensive option is to transition to your spouse’s employer-sponsored plan. Plans generally allow changes outside of open enrollment for a variety of circumstances, such as job loss.
COBRA coverage allows you to stay on your existing plan for up to 18 months following your last day of work. This can be expensive, however, as you’ll pay the entire premium – including the employer portion. This can lead to rates that may be four times higher than you are used to paying.
Depending on your household income, plans on the ACA exchange may be subsidized, which can lead to more cost-effective options, albeit with smaller provider networks that can limit your flexibility.
Some retirees opt for private insurance, seeking flexibility in deductibles, provider networks and other factors. The benefit here is the ability to find a plan that works for you, but costs and availability can vary greatly.
Higher-income individuals pay significantly more for Medicare Parts B and D than other enrollees, due to Income-Related Monthly Adjustment Amounts (IRMAA). These adjustments can lead to an additional $370 a month per person in premiums for the exact same coverage. Eligibility is determined annually based on the Modified Adjusted Gross Income reported on your tax return (two years trailing). This makes managing income, including qualified distributions from 401(k)s and IRAs from age 63 on, important as even one dollar above a new threshold triggers the higher rates.
Read more from our RBC Wealth Insights report Taking control of health care in retirement
HealthView Services, 2017.
Medicare Advantage 2016 Spotlight: Enrollment Market Update, Henry J. Kaiser Family Foundation, 2016.
60% of Americans retire earlier than they planned, Newsday, 2016.
Why so many workers retire earlier than planned, CBS News, 2014.
2018 Medicare Parts A & B Premiums and Deductibles Announced, Centers for Medicare & Medicaid Services, 2017.
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
We want to talk about your financial future.
Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested.