Retirement planning comes with many important financial decisions. The earlier you start to think about your expenses and how you’ll cover them after you stop working, the more prepared you’ll feel when retirement day finally comes. One important factor to consider is how you’ll pay for medical care after your employer-sponsored insurance coverage ends.
For many people, retirement and Medicare eligibility tend to coincide, or at least approach at similar times. However, retirement planning and Medicare costs aren’t quite as simple as that.
But not everyone chooses to retire at the same age when they become eligible for Medicare, so it’s important to understand what options will be available to you upon retirement. Here’s what you should know about Medicare as you look ahead to retirement.
Considerations Regardless of Age
Medicare eligibility typically begins at the age of 65, though some people may qualify earlier due to a disability or ALS. Whether or not you’ve reached this age, if you’re planning to retire soon, there are a few things you should know.
First, you’ll want to speak with your employer’s benefits administrator as early as possible. If possible, plan to meet with them six months before your anticipated retirement date.
During this meeting, you should discuss:
- How coverage for your spouse or any other dependents on your plan could be affected when employer-sponsored coverage ends
- How any available retiree coverage could be used alongside Medicare
- How to obtain written proof of prescription drug coverage from your employer to avoid late enrollment penalties for Medicare Part D
You’ll also want to mark your calendar for your Initial Enrollment Period, which begins three months before you turn 65 and ends three months after your birthday month. If you’re planning to enroll, do so as soon as possible to avoid the risk of incurring late enrollment penalties.
How Social Security Affects Medicare Enrollment
If you’re already claiming Social Security benefits, you’ll be automatically enrolled in Medicare Parts A and B when you turn 65.
Social Security eligibility starts at age 62, but some people choose to delay the start of their payments. Why? The Social Security Administration reduces benefits by a small amount for people who start collecting earlier. The size of the reduction depends on how many months away the person is from full retirement age, which varies based on your birth year.
The longer you wait, the more you’ll be eligible to receive because you’re closer to full retirement age.
For many people who continue working past the age of 62, it makes sense to delay Social Security benefits. Not only will you still be receiving income from your employer, but your benefit will also be larger as you get closer to full retirement age, allowing you to maximize your opportunities to earn and save.
Once you reach full retirement age, Social Security benefits will be recalculated to credit you for any months you didn’t receive benefits due to wages.
In such cases, it’s possible to apply for Medicare alone at 65 and wait to receive your retirement benefits from Social Security. If this option makes the most sense for you, then you won’t be enrolled automatically and will need to file for Medicare manually.
What to Know If You’re Retiring Before Age 65
If you’re retiring before turning 65 or right as you turn 65, you’ll want to enroll during your Initial Enrollment Period. Again, this is a seven-month period that includes the three months before your birthday month, the month you turn 65, and three months afterward.
Otherwise, you could face late penalties.
You’ll need to time your Medicare enrollment so you don’t have any gaps in health insurance upon losing your employer-sponsored coverage. As such, it’s a good idea to start Medicare enrollment three months before your anticipated retirement date.
If you’re eligible for any other type of health insurance coverage, such as retiree coverage through your employer or COBRA, ask your benefits administrator about how these plans could work with Medicare. You’ll also want to find out how your dependents will be impacted when you lose coverage from your employer.
If it will be more than three months before you turn 65, you may need to purchase individual health insurance to ensure you’re covered before you become eligible for Medicare. However, your options could be different if you’re covered under your spouse’s insurance plan. If this describes your situation, have your spouse check with their employer’s benefits administrator.
What to Know If You’re Retiring After Age 65
If you’re over 65 when you retire and have had health insurance through your employer, you’ll be eligible for Medicare through a Special Enrollment Period. This will begin either when you retire or when your employer-provided coverage ends, regardless of which event occurs first. The Special Enrollment period varies for different types of Medicare, however:
- For Medicare Parts A and B, you’ll have eight months to enroll after your coverage ends or your date of retirement
- For Medicare Part D or Part C, you’ll only have 63 days to enroll after your employer coverage ends
To ensure you’re fully prepared when your Special Enrollment period approaches, it’s a good idea to begin researching your plan options at least four to five months in advance.
If you’re retiring after turning 65 and did not qualify for a Special Enrollment period because you had retiree coverage or COBRA benefits instead of employer-sponsored coverage, you may have a different Special Enrollment Period.
Or, you may be considered to have missed your Initial Enrollment Period. In this case, you can still receive Medicare coverage during the General Enrollment Period, but you may be required to pay penalties for late enrollment. The General Enrollment Period allows you to sign up between January 1 and March 31, and coverage will start the month after you sign up.
What Are the Different Types of Medicare?
As you may already know, there are different letters associated with the different types of Original Medicare coverage. Here’s a quick review of what each type covers:
- Medicare Part A offers coverage for hospital stays
- Medicare Part B covers the expenses associated with doctor’s appointments
- Medicare Part D covers prescription medications
Medicare Part C, also known as Medicare Advantage Plans, offers all-in-one coverage for each medical cost listed above. These plans are purchased through private insurers who contract with Medicare. Unlike Original Medicare, Part C plans can also include coverage for hearing, dental, and vision services.
The Connection Between Retirement Planning and Medicare Costs
Your retirement income does affect how much you’ll pay for Medicare. Your modified adjusted gross income will include capital gains, Social Security benefits, and minimum distributions from IRAs and 401(k) accounts, among other sources of income. Together, this income will determine how much you pay for Medicare Part B.
Regardless of how much you wind up paying for Medicare, it’s important to plan ahead for projected expenses. In some cases, healthcare could be your most significant cost during retirement. Fortunately, a Medicare advisor can help you estimate costs and develop a budget. The specifics will depend on your ZIP code and the plan you choose. In addition to the costs of the coverage itself, you’ll want to factor in your health history and which doctors you see now and might need to see in the future. With this information, you should be able to form a rough idea of what you can expect to pay in copayments, deductibles, and services.
You’ll also want to consider that Original Medicare plans don’t cover dental, vision, or hearing. Medicare Supplement Insurance, also known as Medigap, helps cover some costs; but some expenses will need to be paid out of pocket. If you anticipate having such costs, you should also begin searching for coverage options for services Original Medicare doesn’t include.
How to Plan for Healthcare Costs Before Retirement
Healthcare costs typically increase over time, so they’ll continue to be a considerable expense, even with the right Medicare coverage. The good news is that there are steps you can take now to be prepared for these expenses.
Use a Health Savings Account
For example, you may be able to contribute to a health savings account (HSA) for as long as you continue working.
While you’ll no longer be able to continue making contributions after retirement, you could continue using the funds until they’re exhausted. This can help offset the costs of Medicare premiums, deductibles, and other health-related expenses.
Consider Long-Term Care Insurance
You might also consider opting for long-term care insurance, which will provide coverage for certain services that aren’t covered under Medicare, like nursing home care.
Typically, you can only qualify for long-term coverage if you’re in good health, so it’s a good idea to consider purchasing this plan long before you need it.
Choose Your Plan Wisely
Another way to save is to ensure you’re enrolling in the best Medicare plan to meet your personal healthcare needs. There are many options to consider, each with varying covered services and costs for copays, deductibles, and prescriptions.
While selecting Medicare coverage can seem like one of the more daunting aspects of retirement planning, an independent Medicare advisor can walk you through your options.
These experts will discuss your healthcare needs and preferences, presenting suitable options to eliminate the complexity of planning. Then, with the peace of mind of knowing you made the right selections, you can truly relax and enjoy your well-deserved retirement.
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