This is my latest dispatch from the retirement front, an occasional series of articles where I chronicle my personal retirement decisions that I hope can offer some insights for advisers working with retired and soon-to-be-retired clients.
This is the year that my expertise in Social Security and Medicare benefits gets personal. My husband Mike turns 65 in March and is eligible to enroll in Medicare Parts A and B. It is a vexingly complicated decision.
Mike is a federal retiree and as such is entitled to participate in the Federal Employees' Health Benefits (FEHB) program for life. Like most other retirees who paid Social Security and Medicare payroll taxes throughout their careers, Mike can enroll in Medicare Part A, which covers hospital stays and skilled nursing facility costs, for free.
Enrolling in Medicare Part A is a no-brainer. The only reason someone who is 65 would not want to enroll in Medicare Part A is because he is still working and covered by group health insurance (or is married to someone covered by an employer health insurance plan) and wants to continue contributing to a health savings account. Once you enroll in Medicare, you can no longer contribute to an HSA, but you can still take tax-free withdrawals from your health savings account to pay for medical expenses.
Enrolling in — and paying for Medicare Part B — is another matter, particularly for a federal retiree.
Most Americans jump at the chance to enroll in Medicare Part B when they turn 65. Others have no choice. Medicare becomes the primary provider for outpatient services and doctors' fees for most people 65 and older and is usually supplemented by a private supplemental insurance plan, known as medigap, to cover Medicare's deductibles, copayments and coinsurance.
In 2017, most new enrollees in Medicare pay $134 per month for Part B premium. Higher-income retirees, defined as single individuals with modified adjusted gross income (MAGI) over $85,000 and married couples with incomes over $170,000, pay more.
Those who enrolled in Medicare before 2017 and whose income does not exceed the $85,000/$170,000 threshold are protected by a “hold harmless” provision in the Social Security Act. That means their monthly increase in Medicare B premiums in 2017, which are usually deducted directly from Social Security benefits, cannot exceed the dollar increase in Social Security benefits from one year to the next. With a modest 0.3% cost-of-living increase in Social Security benefits in 2017, that means most Medicare Part B premiums won't go up by more than about $5 per month.
But high-income retirees and those who are not collecting Social Security are not protected by the hold harmless provision. They will pay either the new standard Medicare Part B premium of $134 per month or the high-income surcharge amounts which range from $187.50 to $428.60 per month per person in 2017.
Unlike most older Americans, federal retirees have a choice whether to enroll in Medicare Part B. Because their health benefits cover most of the same costs as Medicare, many question why they should pay two premiums to cover the same services. As Medicare Part B premiums have continued to increase each year, the decision gets even harder.
The main advantage of having dual enrollment is that many federal health plans waive or lower all of Medicare's out-of-pocket expenses, said Tammy Flanagan, a federal benefits expert who runs her own consulting firm and provides individual consulting. Because Medicare caters to the needs of the elderly, its coverage is sometimes more generous than federal benefits, often resulting in 100% coverage, Ms. Flanagan said. Essentially, the federal health benefits act as a medigap plan. And because federal plans include drug coverage, there is no need to buy a Medicare Part D prescription drug plan.
It can be a tough choice for a healthy 65-year-old to decide to add a second premium to his budget. But the key is to think about potential health needs five, 10 or even 20 years down the road, said Bob Braunstein, a federal benefits resource counselor with the National Institute of Transition Planning, Inc. The wrap-around coverage of Medicare and federal health benefits can create peace of mind, he said. One serious medical episode could be enough to justify the added premium.
There may be some value in delaying enrolling in Medicare, he added, but it comes at a price. There is a permanent 10% per year penalty applied to future Medicare Part B premiums for every year you delay enrolling in Medicare.
For now, Mike decided to bite the bullet and enroll in Medicare Part B even if it means paying a premium surcharge for a few years. After all, isn't that the essence of insurance: hoping for the best but preparing for the worst? Retiree health care — and health costs — are a key element of retirement planning.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.