Making Sense of Medicare and Planning for a Healthy Retirement

Written by: Scott Crowe, Wealth Manager & Partner

Planning for retirement calls for individuals to clarify their vision regarding future lifestyles and activities. With the help of a trusted advisor, aspiring retirees can develop a clear picture of their retirement and how to support it. However, there remains one significant question mark for even the best-prepared aspiring retirees: covering health care costs.

Health care is typically one of the largest recurring costs in retirement. A 2020 study from Fidelity estimated that a 65-year-old couple could pay an average of $295,000 in healthcare-related costs in their lifetime — a significant expense for those on a fixed income. While other insurance policies, including life and long-term care, are part of a holistic financial plan, health insurance often entails more immediate expenses. Ranging from daily medications to periodic doctor appointments, these can quickly take up a significant portion of a retiree’s budget.

This is why Medicare exists. The American health insurance program for people age 65 and older, Medicare allows qualifying enrollees to choose the coverage that fits their actual or expected needs at a fixed cost based on their income. The age requirements associated with Medicare are important and those who retire before age 65 — either by choice or necessity — can find themselves in a difficult situation. Selecting a plan that fits your needs and goals is essential in order to maintain proper coverage and manage unexpected costs.

To best navigate enrollment, a qualified health insurance broker can assist you through the process. But health care cost planning is also an important conversation to have with your financial advisor, in order to determine what expenses may need to be factored into your budget.

Coverage Before Age 65

Prior to age 65, employer-provided coverage or coverage through a spouse’s plan is normally the best way to obtain affordable and comprehensive health care insurance. If you are planning to retire before age 65 and need health coverage, the Health Insurance Marketplace provided through the Affordable Care Act might offer significantly more cost-effective options depending on your taxable income. Working with a financial advisor is key here, as he or she could help adjust your taxable income and better position you to qualify.

Outside of the Marketplace, health insurance is often very expensive. And if paying from retirement savings, it is a large expense to take into consideration when planning to retire. A comprehensive financial plan evaluates current insurance premiums to estimate how those expenses would impact overall cost of living until you qualify to enroll in Medicare.

Coverage With Medicare

Individuals become eligible to enroll in Medicare seven months prior to turning 65, and the enrollment period ends three months after turning 65. If you remain on an employer-provided or spouse’s policy after turning 65, Medicare may levy a late-enrollment penalty. Be certain to consult an insurance broker or Medicare directly to ensure you are making the most cost-effective choice.

The enrollment process is designed to help participants find a plan that works for their lifestyle and needs. This is when you can choose between Original Medicare and Medicare Advantage, as well as add supplemental plans such as a “Medigap” policy for additional coverage. A health insurance broker can help walk you through these decisions but the most important financial consideration is what your collective monthly cost will be.

One common issue we see is individuals selecting plan options that don’t satisfy their needs. For example, not every plan will cover your prescriptions or local hospital. This can mean a surprise bill at the pharmacy or a big hospital bill if you need care quickly and the nearest facility is out of network. Additionally, coverage add-ons like Medigap might increase the monthly cost of insurance but reduce large one-time payments when care is needed.

A holistic financial plan looks at all aspects of your current life while also assessing future considerations. With age, health care costs tend to rise due to more frequent use of related products and services. Accordingly, it might make sense to discuss prescription plans directly with a drug manufacturer and explore possible price-reduction options. It’s also important to budget for medical expenses that might not be covered by health insurance, such as optical and dental care.

Our team is well versed in retiree health care planning, Medicare enrollment and designing a successful retirement. To discuss all the aspects of a comprehensive financial plan with a financial advisor, contact our team.