Simplifying Medicare and Healthcare Planning in Retirement

December 14, 2023

In this episode of FIN-LYT by EWA, Matt Blocki and Jamison Smith dive into the complexities of Medicare and healthcare planning. Their discussion details everything from the basics of Medicare to considerations for healthcare before and after retirement.

Discover the key differences between Medicare and Medicaid, the historical background of Medicare, and how it has evolved over the years to meet the changing needs of an aging population. Learn about the various parts of Medicare, from Part A to Part D, and understand the costs and premiums associated with each.

Matt and Jamison also provide essential insights into healthcare planning, including strategies to manage your modified adjusted gross income (MAGI) to minimize Medicare surcharges. They discuss the concept of Advantage Plans and why they might not be the best choice for everyone.

Whether you’re approaching retirement or just want to gain a better understanding of Medicare and healthcare planning, this episode offers practical advice and essential knowledge to help you make informed healthcare and financial decisions.

Episode Transcript

Welcome to EWA’s Finlit podcast. EWA is a fee only RAA based out of Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you. And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time. Welcome, everybody. Today, James and I are going to talk in detail about Medicare, what it is, who pays in, who gets the benefits out. So really quickly, this is irrelevant to everybody from an investment perspective, everyone has a Medicare tax that goes right out of their paycheck. There was also under the Obama administration, Medicare tax was started being subject to capital gains tax. So on your investments, that was another way they decided to fund the system.


And the reason that was incorporated is this was a system that supports a lot of Americans. Everyone over age 65 typically enrolls those that are still working. We’re going to talk about that as well. But obviously a huge system, Medicare and then Medicaid, which covers assisted health care as well, for those that don’t have the assets to cover it. Before we go into planning considerations, Jameson, just give us the general background. Why, when, how was Medicare established?


Yeah, so distinction between Medicare, Medicaid, like you said, we’re going to talk about Medicare. Which simplest terms health care for people over the age of 65. Government program also covers some people with some disabilities before the age of 65. But that was started in 1965. JFK actually tried to really try to get it passed. Didn’t work out. Lyndon B. Johnson signed the Social Security amendments. 1965 created Medicare and Medicaid. The original structure was part A and part B, only now there’s part C and part D. But pre 1965, people relied on individual insurance plans, public hospitals, charity support. There was no standard like government healthcare program. And like I said, the changes 2003, part C and D were added and there’s continued changes with this. It’s a pretty big issue in the United States right now for a couple of reasons.


Number one, rising cost of health care. Number two, aging population. Biggest change right now from baby people.


Are living much longer.


Yes, that was the third thing is longevity. People are living longer than ever as health care.


And the investment returns aren’t as big as what the original actual assumptions when they created the amount of the tax as well.


Yeah. So basically paying for it is a big issue.


Absolutely. Well, real quick. So Medicare and Medicaid in the same system. Just real quick, talk about the difference. So Medicare is essentially, if you’re healthy, you’re retired over 65. There’s part a, part b, part c, part D, A and B, you enroll. C and D are optional. Good. In great detail about that. That’s if for someone that has basic health care needs, prescriptions, et cetera, that’s what you get for someone that needs assisted health care. So if you lose two out of six activities of daily living, Medicare system designed to pay in full for 30 days, partially for 70 days, not to exceed 100 days, and then for someone that has assets in general that are not in an irrevocable trust that are just in your name, most states will force you to use those assets.


Medicaid will not kick in until Medicare will pay those 100 days. Assets have to go to cover your own costs for assisted health care. And then if you’re essentially broke or down to certain state by state limit, then the Medicaid system kicks in. But just the huge difference is Medicare is general health care. Medicaid is that assisted healthcare that the lower and some middle class people utilize when they run out of assets, higher net worth people typically have the assets to sustain that, and Medicaid will essentially be irrelevant to them in their financial. So, okay, with that being said, let’s focus on actually, you can reference our podcast on long term care. We do get into Medicaid in quite detail. That was released a couple weeks ago, and you can search that right on our website. So, Medicare, four parts, part a.


Jameson, give us the rundown. What is part a?


So, part a covers hospital insurance, helps pay for inpatient hospital care, skilled nursing, hospice, and some home health care coverage. So there’s no premium for this, assuming what that you’ve paid into Medicaid.


So if you’re invested in Social Security system, then there’s no premium cost for part a, it’s free.


Yeah. You’ve had to pay that tax on your income for ten years and then you would qualify for this. Or your spouse. If one spouse doesn’t work and the other one does, then that works too. If you don’t qualify, if you haven’t paid into it, you may be eligible to purchase this. Obviously you pay a premium for it. Typically there’s some deductibles, copays, coinsurance, similar to like a normal insurance plan.


Got you. Okay, so that’s very helpful. So the majority of people listen to this podcast that will have worked 40 quarters or ten years paying in the Social Security system on a w two wage, they’re going to be vested. Part A is free. If it’s not, if you have a parent that’s international, that doesn’t have this ten years. Part a is actually pretty expensive.




Yes. But for the majority of listeners here that are in the US working for more than ten years, that part a is fully covered, it’s free. Doesn’t matter how much income or assets you have, it’s free. So part b, however, is not. So, before we talk about the cost of part b, what does part b cover that’s different than part a?


Covers medical services, outpatient care, supplies necessary for diagnosing and treating certain things. Includes doctor visits, specialists, preventative care, also covers ambulance service, some mental health services, and limited prescription drug coverage.


Awesome. So this has a cost to it. So, generally speaking, part B is based upon two factors. What your marital status is one, and secondly, what your modified adjusted gross income was two years prior to the year that you’re receiving the part B care. So this has nothing to do whether you’re a perfect clean bill of health and never go to see a doctor, or if you have ten specialists. You see the government doesn’t care how much you’re utilizing it, what your health status is, everyone qualifies. What you pay is based upon if you’re single or married, and then based upon how much your adjusted gross income is. And really the single or married, how that comes into play is it’s based upon what income bracket you fall into.


So in general, the prices in 2024, the part b premiums, if you in 2022 were single at an income under $103,000, you’re going to pay the cheapest price available, which is 174 dollarsventy cents per month. If you’re married, that income limit is a $206,000. Again, if 2022, if you’re at $206,000, we’ll put this chart on the screen here. However, if you are single and go, and you had an income in 2022 above $500,000, your monthly cost per part b goes up from 174 a month up to 594 a month. So that’s over $5,000 a year difference, an extra cost. You’re going to pay $5,000 a year penalty of extra medical costs you’re going to pay for the rest of your life, or as long as that income is over $500,000, because this is based upon income and this is the price.


And this is how one of the ways the government is fixing the system or making sure the system gets funded is really charging those that have more income. So what are some real quick, we’re not going to get too distracted here we’ve covered how to avoid these Medicare surcharges in our Roth podcast. But in general, what are some ways to keep that modified adjusted gross income low, but also keep your lifestyle really high?


Yeah, one of the big things is just efficient tax planning. When you’re accumulating or getting ready to retire, or even early in retirement, make sure you have Roth money. Anything that’s in a Roth account, it’s not taxed. Number one, when you distribute it. Number two, there’s no required minimum distribution. So even if you’re not spending your money and you’re living on a low, you have a low cost of lifestyle in retirement. You have a lot of pretax assets. Maybe your first, I guess, eight years, from 65 to when rmds kick in, you could keep your Medicare costs down, but then the government’s going to say, you have this pretax IRA, you haven’t paid your taxes, start taking money out. That’s going to be shown as income directly answer your question. Roth planning is a really easy way around this.


So let’s say hypothetically, Jameson, you and I are retired at 65. You’re single, I’m single. You make 105,000 between the Social Security, which 85% of that would get taxed, assuming that situation. And you take out a. So let’s just say your taxable amount on Social Security is 30,000. And then let’s say you have a $75,000 IRA withdrawal or mix of iras or capital gains. So your adjusted modified adjusted gross income, you don’t get the standard deduction on the modified adjusted gross income. So it’s 105. Your premiums are going to be 244 a month. And with 105,000 of adjusted gross income after taxes, high level, you’re probably bringing home 515. It’s probably 7500 a month of net income. Okay, then let’s say hypothetically, I had the same deal, 30,000 of Social Security, that’s taxable 85% of my Social Security.


So 30,000, I take out 70,000, not 75,000, my IRA. So my modified adjusted gross income is 100, but I also take another 100,000 because I have a Roth IRA, totally tax free, doesn’t come into modified adjusted gross income. So my income, let’s say, is 7200 from my Social Security and IRA, but then I also get 8300 from my a month from my Roth. So I’ve got 15,000 a month, double what you have income, but I’m paying essentially 50% lower cost in Medicare.


Yeah, it could be huge.


Well, yeah, 30, 40% lower cost in Medicare, but I’m living off of double the income you are. So that’s just a quick example of the importance of retirement income distribution and tax planning while you do your retirement income distribution and the decisions you make leading up into your retirement years.


And this infuriates me because I’ve seen advisors literally not even consider this. And they’ll sell assets in realized capital gains for people that are retired without knowing anything that’s in their tax situation. And the client, I’ve seen this happen multiple times. This is how we’ve gotten some new clients. But the client then is like, why did my Medicare surcharge go up? I didn’t have any more income. And it’s because the advisor just unknowingly realized capital gains in a taxable account. Just stupidest thing in the world.


Just like, all right, Dave Ramsey, let’s calm down for a second. Now, that was smarter than anything Dave Ramsey’s ever said because he doesn’t know how Medicare taxes. But let’s just keep calm. This is not a Dave Ramsey podcast where we freak out on. Right. Anyway, so thanks for bringing that up though, Jameson. All right, so part C, what is part c? Just real quick, part a and part B you have to do. Yeah, part C, do you have to do.


And D. No, it’s optional.


Okay. What’s part C?


This is what we call common term is medigap. So what you want to think about is what does a and b not cover? Certain things, like all prescription drug costs. It doesn’t cover any vision, hearing, dental, any wellness programs, anything like that. So you can buy Medigap part C and D to supplement that. Part C is going to cover hearing. So vision, dental, fitness. Like, it’ll cover like some silver sneakers stuff. Certain wellness programs, you pay a premium, typically pretty inexpensive and guaranteed issued. Just like a and B. If you enroll, we’ll talk about this. You don’t want to enroll, get off, try to go back. Won’t be guaranteed issued, but if you just enroll when you’re 65, guaranteed issued.


And as long as you keep paying premiums, they can never take it away. Yeah, it’s more like a term life insurance policy. Once you’re in.


Yeah. And then part D, also optional. This is going to cover a lot more prescription drugs. This is going to be really important when we talk about the advantage plans here in a second. Pay a monthly premium. This also does, part D has a surcharge is much smaller.


Yeah, it’s based upon income. And if you don’t get in at 65 and you wait till 80 and then you have cancer and I need prescription drug coverage, there’s a huge penalty every year you wait to get in later. So if you’re generally health, I mean, you could go without it and make that up later. But similar to buying life insurance and you’re young, getting it locked in really cheap versus wait until you’re older, obviously, it’s going to be way more expensive when you’re older. Part D works is similar conceptually where there’s a big penalty if you don’t get in every year that you wait to get in. So 65, it’s cheap. If you have family history of something generally and you have a good asset base, we’d recommend just get in.




Now these advantage plans get pushed a long time. So someone instead of, they could get part A and B, and then instead of getting part C and D, they could get an advantage plan. Some are better than others, but let’s just take a deep dive into those.


So I want to say a couple of things. Medicare and Medigap, it’s the gold standard. So you can pretty much go wherever you need to go. Any state, they’re going to take you, and it’s pretty standard. These advantage plans, however, they’re only available in certain areas of the country. And western Pennsylvania, actually southern western Pennsylvania, they’re pushed really heavily. A lot of this has to do with the insurance companies. So basically what these are, you can not do the Medigap part C, part D, you can buy one of these advantage plans. It’s going to give you similar stuff that the Medigap supplements would do. One of the reasons I think these are pushed a lot is because it gives the insurance companies the option to cover what they want to cover versus like Medicare stuff. They have to just pay everything, essentially.


So what this is you’re buying those supplements through a private insurance company. So, like in western Pennsylvania, there’s like two or three companies that offer these and bottom line, what they are. So they cover a lot of the same things. They pay your vision, dental fitness, pay for your gym, stuff. Like almost, I was reviewing one of these a few weeks ago. They’re almost like too good to be true because they make the benefits out to be so good. And a lot of them, there’s ones that cost nothing. And the one that had all the bells and whistles that I was looking at was $19 a month. So when you’re looking at it, they were paying $150 a quarter just to spend at a pharmacy on toiletries. You couldn’t buy drugs, but you could buy deodorant, shampoo, like anything you want.


It was almost like what this is like, where’s the catch here? But what’s important about these is they require you to see a doctor and network.


So if you’re buying, like, your health insurance.


Exactly like your health insurance. But the big reason we don’t like these, and I’ve gotten the opinion on from doctors. Yeah. Because I started digging into this. I’m like, this is way too good to be true. Where’s the catch? And so I started talking to doctors that deal with this stuff every day, and they said there are some horror stories. There’s actually a couple Wall Street Journal articles that explain isn’t, I didn’t make this up. Part D covers these prescription drug costs. So one of the big things is cancer. Like you said, there’s been stories of people that get on a new cancer treatment. So maybe they’re a year in chemotherapy and they qualify for a trial, which is very hard to get on.


So let’s say, okay, I qualify for this trial, which is this new drug, and I have to go to a new hospital or maybe even the same hospital to get this. And I’ve heard stories from doctors that these advantage plans, the insurance companies are just declining to pay for the coverage. So they have control over what they pay and what they don’t pay. And so that can be, I mean, they literally could just. I don’t, I don’t want to cover this. You can’t do this. So now you have to go back to Medicare. Okay, I’m going to go buy the Medigap coverage. Well, once you’re off the supplements, it’s not guaranteed issued. And they’re saying, well, you have cancer, you can’t buy this now. Or is it going to be astronomically expensive?


And you get stuck in this horrible spot where you can’t even get interesting.


Interesting. So some advantages, they’re cheap. But long term medical care, health care is everything, especially when you’re retired and you want to have certainty. Just like a Roth IRA, you don’t have certainty of when you can use the money and not do taxes. Having a gold standard in health care, if you can afford it, obviously, is very important. Okay, excellent. So let’s say hypothetically, someone’s retiring, age 60, they’re not eligible for Medicare. What are their options if they’re coming out of kind of like a w two workforce, and what would they expect what would their financial plan look like before 65 and then after 65.


So one option is cobra coverage. Cobra coverage allows you to continue your employer’s health care for 18 months without.


Evidence of insured, without proving health, anything like that.


Yeah. And you pay the full, it’s going to be more expensive. You’re paying the full cost because instead.


Of it getting shared with your employer, you’re paying the 100%. Yeah.


So that’s one option. Second option, you just go to the marketplace and buy insurance. Just go buy it from an insurance company. That’s no preexisting condition, so you can get that even if you have, you don’t have to worry about getting off your employer plan and going and buying one. They’re not going to disqualify you for having a preexisting condition. Third option, which is probably the most common for a lot of people we work with if they’re married, is to one spouse continues to work and you get on their employer coverage until you’re 65.


Awesome. And then general, let’s say someone has the means to retire at 62. They do that and then 63 and a half the Cobra runs out, both spouses are retired. It’s going to be expensive. I mean we would budget probably 1500 a month to 2000 a month until 65. And even after 65 when you add up the cost a is free for someone with a couple of million dollar net worth, part b, you’re probably going to pay $5,000 easily in premiums with Irma charges. Unless you’ve done a really good job planning in advance, then you’re going to pay the part C and the d.


And then there’s like the donut hole where some out of pockets occur similar to your health insurance where you’ve, in general, even for someone that’s, let’s say in the top 5% of the population is a couple of million dollars in retirement, you should budget even when you’re on Medicare, ABCD, about 10,000 a year between the premiums you’re going to pay, that’s going to come out of your Social Security paycheck for the b premiums, the c and the d, and then all the out of pockets, we got a budget between that 10,000 to 15,000 as a couple or if you’re single, between 5000 to 7500. In general, where that would get way through an oz off is if your income is astronomically high and your Irma charges bump that up even higher.


So just to give a general rule of thumb, health care cost for someone before 65 would probably be double what they are. And then after Medicare costs click in, they would get cut in half as a married couple. Again, 10,000 a year is what we budget, but we also inflate that at a much higher rate than the 3% historic Cola on CPI index because medical costs have risen a much higher rate. Okay, so let’s talk about open enrollment. So a couple of things. If you are retiring at 65, you can enroll, open enrollments between November 15 to December 7, but you must enroll when you turn 65 or you’re going to pay a fee for the rest of your life. You can get in three months in advance. You can enroll three months in advance before your 65th birthday, also three months after.


So you’ve got that window. And just to give you some statistics, in 2022, average american couple in Retirement paid 41,000 in health care cost. Which does that include? Does that include long term health care costs as well? It sounds like it does. Just in general.


Yeah, I think anything that had to, yeah.


So that would be someone paying ten to 15 a year for medical, that’s healthy on Medicare premiums and also averaging out with someone paying like 120,000 a year for someone in a nursing home. So health care is a big issue, big concern. The average couple at 65, which again, the median net worth for someone 65 in America, is like around $300,000 right now. Now, most of the income would come from Social Security. The average couple can expect to pay $315,000 health care expense in retirement, a greater amount to medical cost alone than their actual net worth. Now, how would they afford that? Well, Social Security is not your net worth.


A lot of your cash flow and income, unfortunately, got to take care of yourself and be in good shape financially to have the wherewithal and then also have good shape because medical could be your biggest cost if you don’t take care of yourself. So with that being said, wanted to close up with a hybrid scenario. And this is something we’ve gone through with several clients. It’s dependent by employer. But just to give an example, a lot of our clients, especially physicians, we’ll pick on physicians for a second, and executives and business owners. Our fourth one is retirees.


But all three of those kind of categories of clients, a lot of them work past 65, not because they have to, but if you get that successful, a lot of your identity, you enjoy your work, especially if you’ve actualized how you spend your time at that point. Why would I retire making a good income? I do what I want to do. My kids are out of the house. Yes, sure. I have plenty of time. I’m going to cut my work hours and just keep working. So let’s say someone’s 65 and they’re still working. What do you do with Medicare? So here’s how this works with most employers. So you still have to apply, you still have to sign up for Part A, you still have to do the application on the Social Security website to get your Medicare application in.


However, most employers, you stay on their plan, which is great because most employers are going to probably pay at least two thirds of the cost of the plan, where you’re paying a third, which is a deduction out of your paycheck. So that’s great. Part B, you can defer. So if you’re retired, you can’t defer part 65 past 65 or else you’re going to get penalties. If you’re still working and actively on a healthcare plan, you can defer that. Part B. But the trick is two things. One, you have to apply for part A even though you’re on your employer plan. The second thing is when you do officially retire, there is a employee verification form that your employer will need to sign and provide for Medicare Part B. Then you turn that in.


Let’s say you’re 65, you work two years at 67, you decide to retire at 67, you get this employee verification form for your part b from your employer, you turn it in, and then you do not get penalized for part b for deferring it past 65, and you still are guaranteed to get right in. At that point, you can go get c and d, et cetera, and then navigate, obviously based upon whatever your employer benefits you’re providing during retirement, whether you should still get the d, hypothetically at 65 to avoid the penalties later for waiting till 67. So just some considerations. It’s all a case by case basis and analysis, but hopefully that is a high level overview of how Medicare works.


Some financial planning considerations are taking place before retirement, after retirement, et cetera, with roth conversions, keeping modified adjusted gross income in check et. And then please, as always, reach out if you have any questions. Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button, make sure to rate the podcast and please share with any friends or family members that would also find this beneficial. Thank you very much.

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