Medicare and Work

Published On: May 15, 2018

Written by: Ben Atwater and Matt Malick

When creating retirement plans with clients, healthcare is always a major issue, whether you plan to retire early, work forever or something in between.

Retiring Early

Let’s start with clients who want to retire early, before age 65.  One impediment to this goal is healthcare expenses.  In the years before Medicare eligibility, it’s not uncommon for a retired husband and wife to spend almost $30,000 a year on healthcare premiums.  This compares to about $10,000 per year for a couple who is on Medicare.

A complicating factor in healthcare planning is inflation.  If you look ten years into the future and you compound the above expenses at 6.46% (the historical rate of medical inflation from 1970 through 2017), you get premiums of $56,103 and $19,636, respectively.

A saving grace for early retirement can be Obamacare subsidies.  However, most mass affluent families are not eligible.  For a two-person household in Pennsylvania, you don’t qualify to receive a subsidy if your annual income is above $65,840.

If you work for a company that offers a reasonably priced group plan, you can adopt that coverage at early retirement through COBRA – federal legislation that enables temporary health insurance for people who have lost or left their jobs.  With COBRA you pay the full premium at the group rate that your employer pays.  You can remain on COBRA for 18 months, which could potentially allow you to retire at 63½ with reasonably priced insurance.  Using this strategy, you’d want to apply for Medicare three months before turning 65, the beginning of your initial enrollment period (IEP).

Retiring at age 65

For those retiring at 65, Medicare offers tremendous value, but it’s still expensive and a significant cost throughout retirement.  According to a study that Fidelity Investments recently released, couples retiring in 2018 will need an average of $280,000 to cover health care and medical expenses over the course of their retirement (not including potential long-term care costs).  Fidelity’s estimate includes traditional Medicare, related premiums, co-pays, deductibles and out-of-pocket prescription drug costs.

Working Beyond Age 65

For those planning to work past 65, you may delay the burdensome costs of healthcare in retirement, but some Medicare technicalities do exist.

Under employer group health insurance plans, employers are required to offer coverage to all employees in the group, even those age 65 and over.  This may delay when you apply for Medicare.  In most cases, if you continue to work past age 65, your employer’s insurance is the primary payer.  Because Medicare Part A has no cost, some folks working past age 65 sign-up for Part A, which they then utilize as a secondary payer.  One downside to signing up for Part A is that you are no longer eligible to contribute to a health savings account (HSA).

Medicare Part B costs about $134 per month, so while working you’d want to save this cost and not enroll.  The same goes for the costs of a Medigap policy and a Part D policy (prescription drug).  Although the costs of Medigap and Part D can vary widely, they typically run you approximately $200 and $60 per month, respectively.  Obviously, not an expense you need to incur while on an employer group plan.

If you work full-time past 65, you probably should not claim Social Security upon turning 65, but if you do, Social Security automatically enrolls you in Part A and B coverage.  As we previously eluded, you probably don’t need this coverage and you would opt out of one or both if you’re still on an employer group plan.

When you intend to leave group coverage after age 65, it is important for you to sign-up for Medicare a couple of months before you end your employment so that your coverage will be in place on the first day of your retirement.

All of that said, with the high deductible plans that most employers offer today, you should explore whether Medicare is a better option for you.  Although your employer isn’t allowed to remove you from a group plan, you are permitted to choose Medicare over a group plan.  Sitting down and comparing your workplace plan to Medicare is an important exercise for those working past 65.  If you select to leave the group plan for Medicare, it’s unlikely that the plan will allow you to rejoin.  In other words, this is often an irrevocable decision.  As such, it is necessary that you complete a detailed analysis.

Talk to Us

No matter your circumstances, as you approach age 65, it is best to talk to an expert about Medicare.  We can help get this conversation started.  We can also point you in the right direction to find the best Medigap and Part D policies.  Please don’t hesitate to contact us.

Please visit www.atwatermalick.com/ria for full disclosure materials related to recommendations contained in this update.