In the third quarter of 2020, roughly 28.6 million Baby Boomers have left the job market and retired, according to the Pew Research Center. A recent study by the Insured Retirement Institute revealed only 55% of Boomers have retirement savings, and among this group, half have less than $250,000 which is a staggering and sobering realization1.
As the population ages and retires in greater numbers, some of those who call it a career will be faced with some challenging financial hurdles to clear. One of the largest that will be encountered is the cost of healthcare, which is rising at a rapid pace.
“What about Medicare?” you ask. Medicare may indeed be available for those who have qualified, however, it does have its limitations.
Before you panic though, there are ways to prepare for your future healthcare needs using Medicare as a supplement to your plan.
We’ll take a look at some of the basics of Medicare, what healthcare costs you’ll need to cover yourself, and how you can best manage this often complex wellness system.
What exactly is Medicare, how do I sign up, and what do all the parts mean?
Medicare is a healthcare insurance program for those over 65 years old or disabled, which is funded through the federal government.
Generally, you are eligible to register during a seven-month window around the month that you turn 65. For example, if you turn 65 on July 1st, the window would start three months before July (April through June), and then extend three months after (August through October).
If you miss this window you may still register for Medicare Part A, provided you meet certain requirements. For Part B however, you would have to wait until the open enrollment period, which begins on January 1st and runs through March 31st. Also be careful that if you miss the open enrollment period for Part B, there may be a late enrollment penalty you’d have to pay.
Here are what the four parts mean:
- Part A - This part will offer coverage if you are hospitalized and comes at no cost, provided you paid Social Security for at least 10 years.
- Part B - For times you visit the doctor, receive physical therapy, and experience other “outpatient” costs, as well as have some preventative tests and screens, Part B can pick up the tab. This will cost you a premium though, and amounts will vary based on your situation.
- Part C - The most confusing part, Part C, is also called “Medicare Advantage.” It is a combination of Parts A and B, and comes with lots of rules and regulations. Essentially, Medicare manages private plans and offers coverage that in some cases are superior to Parts A and B.
Now the drawbacks. First, not all coverage is better than what’s available in A or B, and second you’ll also pay a premium based on a variety of factors. Lastly, something very important about Part C is that if you have this coverage and also what’s known as “Medigap” coverage through a private insurer, the Medigap coverage won’t pay anything. In other words, don’t carry both. - Part D - Medicare Part D is actually managed by a private insurance company. This plan covers prescription drug needs, and is a bit more straightforward than Part C. With typical Part D coverage, you pay a premium and are then required to meet a small annual deductible before you receive benefits. Once you meet the deductible, you will pay a copay for your medications based on the drug formulary. Each plan will divide its medications into tiers. Each tiers has a copay amount that you will pay. Both your spending and the insurance company’s spending are tracked until it reaches just over $4,000.
The confusing part though comes here. Once you’ve reached the initial coverage limit for the year, you enter the coverage gap. During the gap, you will pay no more than 25% of the retail cost of your prescription drugs. Your gap spending will continue until your total out-of-pocket drug costs have reached $6,550 in 2021.
It sounds like there are lots of uncovered situations...should I look for more coverage?
Although Medicare will take a good amount of the burden off of your healthcare costs, it doesn’t alleviate all of them. Medicare (Part A and Part B) only covers about half the total health-care costs of Medicare beneficiaries, so it’s critical that you have additional coverage and additional savings (which we will cover shortly)2.
Medigap - On the coverage side, one way to do this is through a Medigap plan. To purchase one of these plans, you must first have Medicare Part A and B plans. Next, you would purchase Medigap through a private insurer, paying them a monthly premium.
These plans can sometimes cover copays, coinsurance, and deductibles that regular Medicare doesn’t. Be aware though, that these plans sold after January 1st, 2006 don’t include prescription drug coverage, so you’ll need Part D for that. Also, if you are married, your spouse would need a separate Medigap plan, as they only cover one individual.
Dental & vision - Since Medicare or typically Medigap plans don’t include dental or vision coverage, you’ll need to get those plans separately too. The good news is, generally speaking, these plans can be relatively affordable and easy to get.
How can I save for or reduce costs?
A Health Savings Account (HSA) can be a great tool. This type of account is funded with pre-tax dollars, and if used on qualified health expenses the money can be used tax-free. HSAs are only available to individuals or families who have a high deductible health plan (HDHP).
HDHPs offer lower insurance premiums in exchange for higher deductibles so they are generally suited for younger, overall healthy individuals. HSA account allows for tax-advantaged growth through a menu of investment options and a way to save for future medical expenses.
It’s not the best idea, however, for those who are nearing retirement and are planning on enrolling in Medicare, since once you enroll you’re no longer eligible to contribute to your HSA.
How to reduce costs?
Review your medical bills. It may be very frustrating and time-consuming to deal with insurance companies, but taking the extra few minutes to look over your bills can save you money if there is an error. Mistakes can and do happen.
Consider using remote health services through an insurance provider or another service. Many insurers have highly qualified healthcare professionals who can assist you right over the phone at a discounted rate compared to an in-person visit. Look for the number on your insurance card or on the insurance website.
Lastly, ask lots of questions, especially before having a procedure done. Costs can add up, and sometimes what you think should be covered in-network actually isn’t. This can save you time, money, and headaches down the road.
What happens if you retire before 65 and have a gap between employer coverage and Medicare?
This can happen for several reasons, and while we may not be considering an early retirement, sometimes what we plan for in life doesn’t always work out the way that we thought. If you retire and are not yet eligible for Medicare, you may have a few options.
The first is through the Consolidated Omnibus Budget Reconciliation Act, better known as COBRA. Through this program, you are allowed to keep your previous employer’s insurance plan (typically for up to 18 months). This, however, can be extremely costly, and better options may be available.
Another is through the Affordable Care Act. Insurance can be purchased through the federal exchange, or through one established by your state. There are a wide variety of policies and coverages available to choose from, some with income-based subsidy. Your out-of-pocket expenses will depend on the deductibles and copays associated with your chosen plan. More information on how to go about this process can be found on healthcare.gov.
Lastly, if you’re married and your spouse is still working, you can research coverage options through his or her employer. This may be more cost-effective and provide better coverage than even what’s available through the exchanges, depending on your income level.
What are my next steps?
I recommend two main areas to focus on in terms of planning for future healthcare costs.
The first has to do with saving. It is generally a good idea to save earlier and regularly. With the power of compounding, the money you put away first could be worth the most down the road, so start this process right away. (When you’re 65, you will thank your 25-year-old self that you did this...trust me.)
The other part is to make sure you stay informed and seek help if needed. Stay up to speed on healthcare news and studies that may be pertinent to your situation, and take some time to learn about your care options. However, as healthcare continues to become more and more complex, no one is going to have all the answers. Given that, it makes sense to ask a professional for help.
While no one knows what the future will hold, by preparing today for the healthcare needs of tomorrow, you and your family will be better able to enjoy the retirement you worked so hard for.
Sources
- https://www.plansponsor.com/baby-boomers-insufficiently-prepared-retirement-need-access-advisers/
- 2 https://www.ehealthinsurance.com/medicare/resources/how-much-does-medicare-cover-health-care-costs
This is for informational purposes only, does not constitute as investment advice, and is not legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Scarborough Capital Management cannot verify the accuracy of, nor assume responsibility for any content of linked third-party sites. Information available on third-party sites is for informational purposes only.
