Planning for Medicare Now and in the Future.
There is one thing that the majority of retirees have in common, and it is Medicare. Anyone who receives Social Security benefits are required by law to enroll in Medicare. That fact, for the foreseeable future, will not change. What has changed and will continue to change is the cost of Medicare. So, the question to be addressed is, what are the Medicare premiums for this year and how will they change in the future?
In 2021, on a national basis, for a member to be fully insured under Original Medicare the premiums are:
- Part A: No premium for those who qualify for Social Security benefits.
- Part B: $148.50 a month.
- Part D (prescription medications): $70.16 a month (includes deductible).
- Supplemental coverage (Medigap Plan policy): $175.42 a month.
- Total cost per month for a 65-year-old couple: $788.16
- Annually this cost is: $9,457.92.
Looking at the federal government’s projected Medicare Inflation rates through the year 2028 we see the following cost increase.
- Part A: No premium for those who qualify for Social Security benefits.
- Part B: 6.21%. The premium is projected to be $226.30 a month.
- Part D: 6.47%. The total cost (premium + deductible) is projected to be over $106.00 a month.
- Supplemental coverage (Medigap) is not projected by the Trustees, but the costs covered by these plans are projected to inflate by 3.25%.
- Historically, on a national average, the “step-up” in rate for these premiums has been over 2.00% for the last 5 years.
- The blended inflation rate for Supplemental coverage is projected to be about 5.40%.
As you can see, Medicare costs are set to increase. Planning for these price increases is vital when creating a retirement plan.
So just how much will these cost increases effect your retirement and what can you do to prepare for them?
THE FUTURE OF MEDICARE
The past and future of Medicare has been and will continue to be marked by one constant: rising premiums. According to the CMS.Gov report for 2011, the standard premium for Medicare part B was $115.40 although many people were only required to pay the 2008 premium of $96.40. Today the part B premium is $148.50. As stated previously, the Medicare Board of Trustees project that by 2028 the part B premium will be $226.30. Increases in part D premiums have also occurred and will continue to occur.
The key, especially when planning for retirement is determining the inflation rate of these premiums. Knowing these inflation rates allows you to know ahead of time how much of your retirement funds will be spent on Medicare premiums.
Finding what these inflation rates will be is easy. This is because the federal government puts out a report each year outlining what the projected future of Medicare will be. Unfortunately, in 2020 The Trustees “believe that it is not possible to adjust the estimates accurately at this time” due to Covid-19”, but from the 2019 Annual Report the Trustees reported that the premiums are projected to inflate through the year 2028 in the way outlined above.
So, what does this mean to your retirement?
Let’s say that there is a 65-year-old couple retiring in 2021. If they enroll under original Medicare, they will pay $9,457.52 annually for their coverage. If they live until age 85 and the inflation rates remain constant their total cost for Medicare will be over $372,000.00!
This is a massive amount of money to spend on Medicare. If you do not properly plan for it, you may find yourself will smaller funds than anticipated during your retirement.
IRMAA
It should be noted that the above projections do not factor in IRMAA. the Income Related monthly Adjustment Amount (IRMAA) adds additional surcharges to these Medicare part B and D premiums for those receiving a higher income in retirement. Being subject to IRMMA can drastically raise the price tag on your Medicare. While we won’t get into the details of IRMAA here, suffice it to say that if your income exceeds $88,000 as a single individual, or $176,000 as a married couple your Medicare premiums will be higher than the numbers projected earlier. You can learn more about IRMMA and whether you will be subject to it by reading this article.
SOCIAL SECURITY AND MEDICARE
Unfortunately, Social Security benefits are not projected to increase at the same rate as Medicare premiums. According to the Social Security board of trusties, social security benefits are projected to increase at a rate of approximately 2.8% while the Medicare Board of Trusties projects the higher rates seen above. This means that Medicare premiums will consistently grow larger at a disproportionate rate to the growth of Social Security benefits.
So, what’s the big deal with that? Medicare premiums are generally paid by deducting the Medicare premium amount from a retirees Social Security benefits. With the projected rates being such that Medicare premiums are increasing faster than Social Security benefits, a retirees Medicare Premiums will gradually grow to consume larger and larger portions of a retirees Social Security income. If Social Security benefits make up a large part of a retiree’s retirement funds, this increasing Medicare/Social Security ratio can be harmful.
And that is just taking into account the base premiums. If you become subject to IRMAA or find yourself in medical situations that require a co-pay, your Medicare premiums could reach the point of exceeding your Social Security benefits.
PLANNING APPROPRIATLY
So, what is the appropriate way to plan for these rising Medicare costs. Unfortunately, there isn’t a lot you can do about the standard premiums, but there are steps you can take to make sure you don’t get burdened with IRMAA or other charges.
First, having a good Medigap plan can be beneficial. These plans cover services and treatments that are not covered by Medicare parts A and B. Having a good Medigap plan will help to make sure you are not caught off guard by large medical bills that traditional Medicare doesn’t cover. Of course, there are many different plans available with varying associated benefits and costs. Make sure you do your research and speak with your retirement planner to ensure you get the best plan for your needs.
Secondly, you can avoid becoming subject to IRMAA by reducing your taxable income in retirement. The decision of whether you will have to pay IRMAA is made base upon your tax return from two years prior. Taking the time to work out strategies that reduce your taxable income can be the deciding factor when it comes to how much your Medicare premiums will cost you in retirement. One strategy may be switching from traditional accounts to Roth accounts. Roth accounts allow you to withdraw your money later in life, tax free.
If you are interested in learning how different retirement strategies will affect your income in retirement, you may find our Medicare IRMAA Calculator software to be interest. This software allows you to project your future Medicare costs quickly and accurately. It gives you the inside scoop on how Medicare premiums will affect your income. It also allows you to effortlessly explore other investment vehicles and see how they will save you or your client money in retirement.
Summary
In summary:
Medicare can be a fantastic program, but it must be planned for correctly to ensure you receive all the services you need without having to overpay.
Medicare Premiums in 2021 for Original Medicare will cost $9,457.92. This number does not include IRMAA or any charges not covered by Medicare.
The Medicare premiums will continue to rise just as they have in the past. The Medicare Board of Trustees project that by 2028, part B premiums will inflate by 6.21% and part D premiums will inflate by 6.47%. These inflation rates will result in premiums of $226.30 a month for part B and over $106 a month for part D.
If these inflation rates remain constant, a couple who retires at 65 and passes away at 85 will pay over $372,000 in Medicare premiums.
Generally, Medicare premiums are paid for by taking money from a retiree’s Social Security benefits. Unfortunately, Social Security benefits are not projected to rise a quickly as Medicare premiums. This will result in retirees receiving less money from social security as time goes on. If Social Security is a retiree’s main source of income, this can be devastating.
Planning for the future with a qualified Retirement Planner who understands the risks posed by rising Medicare premiums is important to a secure retirement. There are steps you can take to reduce how much you will pay in Medicare costs such as purchasing good Medigap coverage as well as reducing taxable income in retirement to avoid IRMAA.
They say there is only one constant in this world and that is change. That is certainly true when it comes to Medicare premiums. Medicare premiums are projected to continue rising throughout the future. Fortunately, these changes do not need to come as a surprise and with proper planning your retirement can be healthy, happy, and prosperous.
