Medicare and Work
Published On: December 10, 2020
Written by: Ben Atwater and Matt Malick
Whether you plan to retire early, work forever or something in between, healthcare is extremely important for all of us.
Let us start with clients who want to retire before age 65. One impediment to this goal is healthcare expenses. In the years before Medicare eligibility, it is 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 6.68% (the historical rate of medical inflation from 1970 through 2019), you get premiums of $57,273.18 and $19,091.06, respectively.
A saving grace for early retirement can be Obamacare subsidies. However, most mass affluent families are not eligible. For a two-person household, you do not qualify to receive a subsidy if your annual income is above $68,960.
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 would 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 is still a meaningful cost throughout retirement. According to a study that Fidelity Investments recently released, couples retiring in 2020 will need an average of $295,000 to cover healthcare 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.
You must enroll in Medicare beginning in the three months before your 65th birthday, the month of your birthday or the three months following your birthday. If you do not sign-up for Medicare during this window, you will face a lifetime penalty on your premium. However, if you are still employed and your employer provides your insurance, then the lifetime penalty likely will not apply and you can probably wait to enroll in Medicare.
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 is free for those who have a 10-year employment history, 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 $148.50 per month (the premiums are income-based and can be as high as $504.90 per month), so while working you would want to avoid this cost by not enrolling. 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 (Part D premiums are income-based), 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 at age 65, but if you do, Social Security automatically enrolls you in Part A and B coverage. As we previously eluded, you probably do not need this coverage and you would opt out of one or both if you are 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 is not 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 decide to leave the group plan in favor of Medicare, it is unlikely that the plan will allow you to rejoin. In other words, this is often an irrevocable decision. As such, it is smart to 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, Part D or Advantage policies. Please do not hesitate to contact us.